Friday, 18 September 2009

FHA Will Tighten Credit Standards

As expected, FHA will tighten lending guideline for FHA mortgage.

Under planned rules, the agency said lenders making FHA-insured loans would need to show net worth of at least $1 million, up from $250,000, and further increases might be sought later. The agency is seeking to ensure that lenders have funds available to compensate the FHA if their loans fail to meet quality standards.

For refinancings of FHA loans, the agency plans new rules for verifying income and other quality-control checks. It also will impose a maximum loan value of 125% of the current estimated home value on refinanced loans, in line with government-backed mortgage investors Fannie Mae and Freddie Mac.

Appraisals will be valid for no more than four months, down from six to 12 months previously. The FHA also plans to change rules aimed at averting pressure on appraisers, making them more consistent with those adopted earlier this year by Fannie and Freddie. Mortgage brokers or bank employees paid on commission won't be allowed to order appraisals.

In addition, the FHA plans to hire a chief risk officer for the first time.

In short, FHA is saying "if something goes long, FHA will not insure loan loss and will go after you".

While "There will be no taxpayer bailout," FHA Commissioner David Stevens said, I think approx. 30% of FHA mortgage that was issued in 2008 are under water. So soon, I expect tax payer bail out of FHA mortgage.

Anyway -- this will certainly slow down First Home Buyer driven US residential real estate market and it will cause "second dip" in real estate price, especially in former bubble area such as California and Nevada. It will be interesting to see how it goes in early 2010.

Happy Investing!!!

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