Agency rethinking rules on how much financial help sellers can give
It was easy to miss, but last Friday afternoon the Federal Housing Administration hinted that it is finally ready to resolve a real estate and mortgage issue that has been simmering away on the back burner for the past two years: How much in the way of financial concessions can home sellers provide to buyers using FHA mortgages?
It's an important subject, since FHA traditionally has allowed buyers, sellers and their advisers more latitude than any other federal mortgage player when it comes to concessions.
In some parts of the country, especially where settlement charges and transfer taxes are high, buyers with little cash on hand after scraping together a down payment routinely depend on FHA's generous standard on concessions from sellers.
In January 2010, David Stevens, the FHA commissioner, proposed lowering the ceiling on concessions -- funds moved from the seller's side of the transaction to help defray the costs of the buyer's loan origination and closing expenses -- from the long-standing limit of 6 percent to 3 percent.
Stevens, who is now CEO of the Mortgage Bankers Association, said that insurance claims on loans where sellers provided buyers a full 6 percent in assistance were as much as 50 percent higher than when concessions represented a smaller chunk of the total deal.
High concessions, he added, "create incentives to inflate appraised values." He estimated that the new, reduced limit on concessions would go into effect during the summer of that year. But the proposal never was finalized, no changes took effect, Stevens left the FHA in 2011, and nothing much has happened publicly on the matter since then.
But tucked away at the end of an announcement last Friday on indemnification rules for mortgagees, FHA's acting commissioner, Carol J. Galante, disclosed that the agency is now ready -- or more accurately, almost ready -- to cut the seller concession limit from 6 percent to some unspecified lower amount.
Though FHA officials aren't talking for the record about what's coming, conversations I've had suggest that interested real estate and mortgage professionals ought to know the following:
1. Nothing is likely to change soon because FHA plans to "re-propose" its plan sometime in the first half of February. A re-proposal is significant because rather than an adoption of a final regulation -- which FHA could have opted to do -- it now starts the bureaucratic clock ticking once again.
Under federal administrative law procedures, FHA will have to give the public additional time to comment on its latest proposal, then take adequate additional time to analyze the responses it receives.
In this case, the agency plans a relatively short public comment period -- just 30 days -- giving industry groups little time to formulate responses.
But since the National Association of REALTORS®, the mortgage bankers, homebuilders and other groups had submitted their views on seller concessions in the late summer of 2010 -- all of them critical of a flat 3 percent cap -- FHA believes the industry doesn't need a lot of time to come up with positions on its revised proposal.
2. The 30-day comment period is likely to be followed by at least 60 to 90 days for FHA to consider revisions to its proposal, redraft the text as needed, and publish the final rule in the Federal Register with an effective date sufficiently in the future to allow pending deals to go to closing.
So, for anyone who has buyers or borrowers needing the full 6 percent concessions to close sales, you've got three or four months at least -- maybe until the early summer -- to nail down your transactions.
3. Though Galante said the new limit on seller concessions would put FHA "more in line with industry norms," don't expect any direct copycatting of Fannie, Freddie or other agencies. FHA's proposal is likely to be more nuanced than any other agency's approach.
Fannie and Freddie, for example, generally impose a 3 percent ceiling on concessions. The U.S. Department of Veterans Affairs is more generous, allowing an across-the-board 4 percent.
But FHA has spent much of the past 18 months gathering data on insurance claim differentials based on mortgage amount, loan-to-value ratios, and whether the property is newly constructed and sold by the builder or whether it's an existing home being resold.
So look for a proposal next month that allows higher-concession ceilings on small loans, where closing costs represent a larger hurdle percentagewise than larger loans, and lower concession ceilings on loan amounts above some threshold.
Don't be surprised either if FHA puts a dollar amount on seller concessions or imposes stricter standards on newly built homes -- which might get a 3 percent cap -- compared with resale homes.
But no matter how the proposal comes out, you'll still get a shot -- at least for 30 days -- to tell FHA where it went wrong.