Pressure from loan defaults has pushed cash reserves at the Federal Housing Administration below mandated minimum levels, but the agency's head says taxpayers won't be asked to make up the difference.
Instead, the agency is moving is pressing ahead with policy changes aimed at reducing its exposure to risk as the FHA coffers have been hit by staggering losses from defaults and fraud.
Borrowers will be required to have higher credit scores, though the agency did not release details of what the heightened credit requirements will be.
Among the other significant changes are a raise in cash reserve requirements for lenders that handle FHA loans. The current standards call for $250,000 but will be raised by $1 million and possibly more in the future.
In addition, the agency will appoint for the first time a risk compliance officer who will be responsible for overseeing risk of the insurance fund. FHA is establishing new credit rules to verify income and credit history as well in order to minimize defaults in the future.
"Given the size and scope of the FHA and its importance to today’s market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protections," Commissioner David Stevens said in a statement.
Another change likely to gain attention is FHA's moves to "assure appraiser independence." A similar move by government-sponsored enterprises Fannie Mae and Freddie Mac have drawn widespread criticism in the industry for holding up modifications to distressed loans.
The FHA has never used taxpayer money to cover losses from its borrowing program, but has been hit hard by the rash of defaults that have plagued the industry. Part of the formula for making up the drop in reserves is likely to entail addressing fraudulent loans that contributed to the FHA's losses.
The agency is amid preparing its actuarial study that will be submitted to Congress in November.
Stevens said the agency has sufficient funds to cover its losses even without the proposed changes. But the new regulations and the appointment of the risk officer will help prevent similar problems from happening in the future, he said.
FHA has about $30 billion in reserves, representing 4.4 percent of the loans it insures. The agency is a key backer for first-time homeowners and is now insuring about 5.3 million mortgages, compared to 4 million three years ago.
Calculators and Advice from Bankrate.com:
- Compare Mortgage Rates Nationwide
- Struggling to Save Your Home? Get Help Here