The Federal Housing Administration had a busy day last Friday as it finally acknowledged its cash reserves would fall below the legal limit, tightened its credit and valuation standards, and reassured the public that it could stay afloat without any help.

“There will be no taxpayer bailout,” FHA Commissioner David Stevens told reporters Friday. “To be clear, the fund’s reserves are sufficient to cover our future losses, so FHA will not require taxpayer assistance or new congressional action.”

Nevertheless, Stevens confirmed that by September’s end, the agency would miss its congressionally mandated mark of keeping a reserve on hand that’s equal to 2 percent of the loans it insures.

The FHA’s reserves had been as high as 6.4 percent two years ago, but they have been steadily eroded as the federal government accelerated its mortgage-insurance programs to counter credit problems stemming from the nation’s housing-sector collapse. In 2006, FHA-backed loans accounted for 2 percent of the nation’s residential mortgages; by the first half of this year, they represented fully one-fifth of all U.S. home loans.

Stevens insisted that the FHA would boost its reserves without largesse from Congress or a hike in the agency’s mortgage-insurance premiums. And even though Stevens said FHA auditors projected “capital reserves getting above 2% within a couple of years with absolutely no changes” in FHA policies, he announced a major overhaul in its credit standards. “These are the first steps in what will be an on-going increasing look at risk management within FHA,” he said.

Those changes largely dealt with refinances and lender net-worth requirements. But most industry attention was focused on the FHA’s new appraisal policies, which added language from the controversial Home Valuation Code of Conduct.

The industry has been split over the HVCC, which lays out basic ethical and procedural guidelines for the parties involved in a home valuation, including appraiser independence and geographical familiarity standards. The National Association of Realtors warned the code could have “unintended consequences.” The FHA declined to adopt the guidelines earlier in the year, when government-sponsored mortgage insurers Fannie Mae and Freddie Mac said they would adhere to the standards.

The FHA also announced for the first time that it would hire a “chief risk officer” to oversee the coordination of the agency’s risk-management efforts, which currently are spread across a number of officers in different departments of the bureaucracy.

Thomas Lawler, a housing economist based in Leesburg, Va., said the new standards were critically important, especially a rise in the lender net-worth requirements to $1 million from $250,000. That was the first adjustment in net-worth levels since 1993.

“This is literally HUD spelled backwards-–duh!” Lawler told the Wall Street Journal. “These are things they should have been doing for a long time.”

In a separate development, the Senate passed an appropriations bill authorizing the FHA to insure another $400 billion in single family loans during fiscal 2010, which starts Oct. 1.

 

09/21/2009 BY: ADAM WEINSTEIN  http://www.dsnews.com/articles/fha-confirms-its-low-reserves-tightens-standards-to-include-hvcc-2009-09-21