In addition to announcing it would hire its first chief risk officer in its 75-year history, the Federal Housing Administration (FHA) says it will implement a set of credit-policy changes that will enhance the agency's risk management functions.
Both actions come as the agency's annual independent actuarial study is being completed. The study will be sent to Congress in November and is expected to show the capital reserve ratio dropping below the congressionally mandated threshold of 2%.
‘To be clear, the fund's reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new congressional action,’ says FHA Commissioner David Stevens. ‘That said, 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.’
FHA's congressionally mandated capital reserve ratio, which is determined by the independent actuarial study, measures excess reserves above and beyond projected losses over the next 30 years. FHA continues to hold more than $30 billion in its total reserves today, or more than 4.4% of its insurance in force.
The FHA's risk management functions are currently dispersed across a number of offices. The chief risk officer will oversee the coordination of the FHA's efforts to concentrate risk management in a single division devoted solely to managing and mitigating risk to the FHA's insurance fund – across all FHA programs.
The proposed policy changes largely focused on ensuring responsible lending and risk management for FHA-approved lenders, the agency says. The changes will ensure FHA lenders have long-term interest in the performance of the loans they originate.
One of the proposed changes would require supervised mortgagees to submit audited annual financial statements to the FHA. This requirement would ensure that those entities with which the FHA does business are adequately capitalized to meet potential needs, the agency says.
Another proposal revises current procedures for streamlined refinance transactions to establish new requirements for seasoning, payment history, income verification and demonstration of net tangible benefit to the borrower; provide for collection of credit score information when available; and to cap the maximum loan-to-value ratio at 125%.
The FHA is also seeking to provide new new guidelines on ordering appraisals for FHA-insured mortgages and reaffirm existing policy on FHA requirements regarding appraiser independence and geographic competence. The agency's policies would adopt language from the Home Valuation Code of Conduct, essentially aligning the FHA's policies with the standards set forth at Fannie Mae and Freddie Mac.
Additionally, the FHA wants to modify the approval process for mortgagees looking to originate FHA loans.
Mortgage brokers would continue to be able to originate FHA-insured loans through their relationships with approved mortgagees but would not be able to receive independent FHA approval for origination eligibility.
The FHA also plans to propose to increase the net-worth requirement for approved mortgagees to meet industry standards. The requirement is currently at $250,000 and has not been increased since 1993. The Department of Housing and Urban Development (HUD) is proposing an initial increase of approximately $1 million that would be in place within one year of the enactment of this rule.
HUD may propose that the net-worth requirements be increased further in future years to a level comparable to those required by government-sponsored enterprises and other market institutions.
The proposed rule provisions will be subject to a notice and comment period, after which the final rule will take effect.
SOURCE: Federal Housing Administration