I recently wrote a blog discussing the tightening of various underwriting rules by Fannie Mae and Freddie Mac.  FHA has now joined the fray with an announcement of various ways they are tightening the rules.

First, the most important change is the proposed increase in the initial Mortgage Insurance Premium from 1.75 percent to 2.25 percent. The initial premium is not a cash payment but instead is added onto the loan balance.

For example, if a borrower were to make a 3.5 percent down payment on a $300,000 home, the nominal loan amount is $289,500. Adding the MIP of 2.25 percent, or $6,513.75, yields a final loan amount of $296,013.75. After making ten years of payments, the loan balance would still not be reduced to 80 percent of the initial purchase price.

Second, FHA has asked Congress for permission to increase the annual premium that is charged to borrowers. Currently that amount is one-half of one-percent, or $123.34 per month. The effect of this change, assuming it is approved, will be to start increasing the FHA reserves that have been bettered by recent losses. According to an article in The Wall Street Journal, the agency's reserves fell 72 percent to about one-half of one percent of the balance of the loans it has insured.  

FHA is going to require a minimum FICO score of 580 rather than the previous limit of 500 to get the 3.5 percent down payment program. According to Money-Zine, only 15 percent of Americans have credit scores below 600.  

FHA will do loans for people with FICO scores of less than 580, but they now have to make a 10 percent down payment. At a score of 500, about 97 percent of people have better credit. But FHA says that these are "borrowers who have historically performed well." Given the losses on the FHA portfolio of loans, I would like to see the data that shows such good performance.

In another move, the amount of allowable seller concessions was reduced from 6 percent of the purchase price to 3 percent.

Not mentioned in the article is the widespread rumor that FHA will increase the minimum down payment to 5 percent. Additionally, there is a move in Congress to increase the maximum FHA loan amount in high-cost areas from $729,750 up to $829,750.

Speaking as a loan originator, this makes me wonder why in the world we are doing loans for people who have such bad credit. Neither do I think that it is wise policy to allow 3.5 percent down payments on loans of $729,750 or $829,750. This is not much different than zero down payment loans that created so much of our current problem. Anyone who can qualify for a loan amount that large should have had the financial foresight to save enough for a reasonable down payment, say 10 percent.

I realize the FHA commitment to under-served communities, but the large group of people who have been financially irresponsible does not fall within my definition of "a community." Trying to serve that group is (at least in part) what got us into the current mess we are in.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.