State adopts new foreclosure rule

Mortgages insured by the Federal Housing Authority have been among the easiest to qualify for. But starting Monday, they’ll be harder to get – and cost more.

In recent years, FHA mortgages have become incredibly popular, as banks, scared by the mortgage meltdown, looked for guarantees to protect loans to even well-qualified borrowers. Today, these government-backed home loans make up more than 30% of the mortgage market, up from 3% in 2006. And for borrowers, the FHA-backed loans require lower down payments and credit scores than most other mortgages.

Now, the federally guaranteed loans are getting less attractive to borrowers. In an effort to recoup losses sustained over the last few years of mortgage mayhem, the Department of Housing and Urban Development, which oversees the FHA loan program, is raising the cost to borrowers and raising the required credit scores. But in order to earn more money on fewer loans to less risky borrowers, the agency is increasing the mortgage insurance fee tacked on to FHA loans to up to 0.95% (it had been 0.50%). Over the life of a 30-year $300,000, that’s at least an additional $24,000 in payments. And because higher annual premiums result in larger monthly payments, some buyers likely won’t be able to borrow as much.

More FHA lending adjustments and price hikes may be on the way. “We will make additional changes as needed,” says a HUD spokesman, citing the need to protect the FHA’s reserve funds. From September 2008 to June 2010, the fund fell from $19.3 billion to $3.5 billion as it helped cover borrowers’ defaults and foreclosures.

All this spells bad news for homebuyers – and at a time when houses are significantly cheaper. With banks reluctant to lend without a guarantee, and private institutions mostly refusing to provide one, the federal government has been the guarantor of last resort for would-be home-owners. And now they’re taking a step back. “The signal is that FHA is expecting a somewhat better borrower,” says Keith Gumbinger, vice president of mortgage-data tracking firm HSH Associates. As of Monday, borrowers with credit scores below 500 will no longer qualify for an FHA-backed loan, and those with scores under 580 must put at least 10% down — up from the 3.5% down payment required previously. For the more 15 million consumers with scores in that 80-point range, the message is clear: If you want to buy a home, get your credit score up first.