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FHA Update

National Council of State Housing Agencies2011 HFA InstituteJanuary 13, 2011

Current Landscape

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Current StateLandscape• FHA has experienced significant volume growth in the last few years• FHA provides a significant source of liquidity for the housing market and continues to be a

primary source of credit for underserved markets• FHA programs continue to be one of the few options for low down payment financing and a

wider range of eligible credit scores (580 minimum score)• FHA maximum loan amounts have been increased to considerably higher levels than the

traditional FHA program allowed.

Challenges• Capital Reserve fell below congressionally mandated 2%• Certain books of business have poor performance• Oversight practices and risk management controls were outdated and insufficient to support

current volume levels.• Growing insurance claims and foreclosures challenge servicing and Asset Management

resources and structure• Risks of applying FHA program and credit guidelines at higher loan amounts

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Balancing Strategic Objectives

Key FHA Objectives• Manage the long term viability of the MMI fund

—Focus on sustainability to ensure FHA lending programs can be maintained.

• Maintain our mission of serving the underserved and the first time homebuyer —Ensure that those who buy a home today, buy a home they can keep

over the long term• Support the overall housing market during the housing crisisImpact• Pace of change will continue

—Both policy and process• Oversight processes are being updated to match our size and risk• Continued review and adjustment of policy and programs to manage risk

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What Should We Expect

• FHA will not play this broad role for the long term

• FHA will serve it’s mission with balanced risk management

• FHA is committed to providing more transparency to the market place– Industry communication– Consistent messaging– Input from the industry in addressing larger

issues.

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What Should We Expect (cont.)

• FHA remains committed to comprehensive FHA reform legislation which would further enhance FHA’s enforcement capabilities and risk management efforts.

• FHA will continue to emphasize the role of lenders as responsible stewards of underwriting quality loans that will perform sustainably over time.– Quality underwriting is not only essential, it is

expected– New loan level review processes have been enhanced

to more effectively manage risks and minimize losses

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Recent and Pending ChangesProtecting the MMI fund

Maintain the MissionSupport the Housing Market

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Protecting the MMI Fund

• Enhanced oversight processes – focus on lender and servicer accountability and responsibility (2010)– Balanced Enforcement– Post Endorsement Technical Review

• File selection focused on risk and performance

– Loss Mitigation review of larger servicers• Emphasis on Loss Mitigation Efforts

– Review of Servicer Foreclosure Processes– Delegated Endorsement and Insuring

authority – Monitored at servicing and underwriting level

• Office of Risk Management and Regulatory Affairs (2010)– Chief Risk Officer– New Office reporting to Commissioner– Congressional Funding – Fraud and Risk

Management Infrastructure

• Lender Approval Policy (01/01/11)– Strengthen capacity of FHA approved

lenders - Higher Net Worth Requirements phased in over 3 years

– Discontinue loan correspondent program; replaced with Sponsored Originator

– Focus oversight efforts on approved lenders

• Mortgage Insurance Premium– Increased Upfront MIP to 2.25%

(1/12/10)– Upfront premium reduced to 1%

from 2.25%; annual premium increased to 85/90 bps. depending on LTV (10/4/10)

– Results in approximately $300 Million per month in value to the MMI Fund

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Protecting the MMI Fund

• Credit Policy Changes˗ LTV/FICO Changes (10/4)

• Minimum 500 FICO• >580 eligible for max financing• 500-579 limited to 90% LTV

˗ Provide Manual Underwriting guidelines for debt to income ratio exceptions

˗ Reduce maximum seller concessions

• HECM Program (10/4)˗ HECM Saver – lower upfront premium

(.01%) with lower max principal limit˗ HECM annual MIP increase to 1.25%˗ Principal Limit Factors adjusted

slightly which result in lower maximum principal limits

• HECM Property Charge Loss Mitigation (1/3/11)– Curative guidance for existing

delinquencies• Publish requirements for

reporting delinquencies• Emphasis on Loss Mitigation

Requirements• Due and Payable Approval

Process• Additional funds allocated for

housing counseling– Preventative Rule Making to

implement policies to reduce risk going forward. (Q2 2011)• Require a financial assessment

at origination to determine borrowers ability to pay recurring living expenses

• Limit on funds advanced by lenders for delinquent property charges)

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Protecting the MMI Fund• Lender Indemnification Changes (Q1 2011)

– Pending Rule Change enhancing FHA Indemnification authority

– Broad expansion to emphasize lender responsibility for originating quality loans that meet FHA standards

• Condo Recertification and Approval Process (12/10)

˗ Established condo project eligibility requirements

˗ Require project re-approval and recertification for 25,000 plus condo projects

˗ Condo Guidelines˗ Temporary Guidelines 11/09

extended through 6/30/11˗ Regulatory and policy guidelines to

be updated and implemented in mid-2011

• Operational Process Improvement throughout FHA (ongoing)

– One HOC, four locations– Training and Outreach– Internal Processes to support pace of

change, ability to effectively execute

• Numerous policy reviews and risk analytics are in process

– 2-4 unit properties, refinance guidelines, underwriting guidelines for higher risk transactions, review of automated underwriting scorecard

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Supporting the Housing Market

• Streamlined Refi Program– Allows eligible, existing FHA

borrowers to refinance to lower rate programs with minimal documentation

• Government Programs to assist borrowers to stay in their homes– Home Affordable Modification

Program– Hope for Homeowners– Emergency Homeowner’s Loan

Program (ELHP) – new Treasury program for unemployed borrowers (Q 1 2011)

• FHA Refi for borrowers in negative equity position (10/8/10)– Includes lenders “forgiving” and

subordinating portions of debt

• Providing liquidity for the housing market– FHA continues to be primary source

of high LTV lending (above 95% LTV)– Expanded Loan limits– Broader FICO and LTV guidelines

• Condo Guidelines (New regulations and requirements under development)– Temporary guidance provided more

flexible owner occupancy, pre-sale, and FHA concentration limits

• Opportunities for Enhancing Programs while managing Risk– 203 K program (home improvement

loans) expansion– Energy Efficient Mortgage Product– In-depth review of programs and

products – what works, what doesn’t, opportunities to improve

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Maintain Mission of Serving the Underserved

• Extensive Housing Counseling Support– Grants to Non-Profits and Counseling

Intermediaries– Grants to support counseling Training– Development of Counseling Protocols

to ensure effectives of counseling programs

– Oversight and Monitoring of counselors

– Support of efforts to educate public and enforce on scams affecting delinquency and foreclosure process, seniors, underserved borrowers

– Creation of new Office of Housing Counseling

• New HECM Saver– New pricing option with minimal

upfront fees for borrowers who want less cash

• Broader FICO and LTV guidelines to ensure access to lending for underserved, qualifying borrowers

• Continue to focus on opposing predatory lending, fraud and irresponsible business practices

• Consumer Protection in the home buying process

– RESPA– SAFE Act

• Encourage lenders to adopt FHA Guidelines

– eliminate policy overlays that limit availability to the programs

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