FHA eliminates credit standard within days of implementation

A recent proposal suggested the implementation of a new lending standard that could have resulted in a significant number of borrowers prevented from having their mortgage backed by the Federal Housing Administration.

A recent proposal suggested the implementation of a new lending standard that could have resulted in a significant number of borrowers prevented from having their mortgage backed by the Federal Housing Administration. However, the agency recently chose to scrap the new rule.

Under the standard, borrowers who had an outstanding credit dispute amounting to more than $1,000 would be disqualified from having their home loans backed by the agency. But after a number of industry groups and experts claimed the rule would have a damaging effect on the FHA's book of business, it will cease to exist altogether.    

"There is clearly a bigger ripple effect here than the Department of Housing and Urban Development might have anticipated going into this revision," said John Burns Real Estate Consulting senior vice president of research and business development Lisa Jackson, according to HousingWire. "Any measure that impacts even 10 percent of sales is meaningful and our analysis shows it would be far greater in some markets."

Prior to doing away with the new standard, the FHA proposed a change that would allow borrowers to still qualify if they had an outstanding credit dispute that was a result of a life event, such as a medical emergency, death or divorce. However, after carefully weighing their options, analysts at the agency determined it was best to totally eliminate the credit standard.  

"There are two positives to this latest decision: HUD is willing to analyze the real implications of the housing market before they put a new measure in place, plus they are engaging feedback on the issue," said Jackson.

Meanwhile, leading up to this decision, a number of experts questioned the timing of the new lending standard. In recent months, there was speculation that the FHA would be in need of the next major government bailout. As a result, this standard had a chance of bolstering the agency's emergency Mutual Mortgage Insurance fund, which had plummeted to just 0.2 percent by the end of 2011.  

Additionally, other analysts said that the rule would have the most damaging effect on first-time homebuyers, and could have cut demand by up to 20 percent. However, now that the standard, which was set to begin April 1, will no longer be implemented, a number of prospective borrowers should be able to find options for homeownership through the FHA.



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