Federal Housing Administration (FHA) Commissioner David H. Stevens, in his latest conference call, discussed the FHA’s Final Rule, “Federal Housing Administration: Continuation of FHA Reform—Strengthening Risk Management through Responsible FHA-Approved Lenders,” among other things. The following is FHA Commissioner Stevens’ comments:

In April of this year, FHA issued a Final Rule, “Federal Housing Administration: Continuation of FHA Reform—Strengthening Risk Management through Responsible FHA-Approved Lenders,” which made many changes to the way FHA conducts business. As part of our ongoing commitment to better FHA’s ability to manage its risk, the rule strengthened our lender approval criteria and made FHA-approved lenders responsible for the oversight of mortgage brokers.

The final rule, which followed a proposed rule for public comment in September 2009, aligned our risk management practices within the conventional marketplace and will help FHA mitigate losses and decrease risk to its insurance funds. In developing the rule, we welcomed your input, recognizing the need to balance our policies with the needs of our responsible industry partners.

Since its publication, we have received additional feedback from program participants. After reviewing your comments regarding transitioning to compliance with the new changes, we are extending certain effective dates in order to give our lending partners more time to transition to their new business models.

Temporary Extension of Deadline for Obtaining Unconditional Direct Endorsement Approval–Extended to July 1, 2011
We are extending the deadline for obtaining unconditional direct endorsement (DE) approval for those DE-eligible entities that wish to participate as a Principal in Principal-Authorized Agent originations. A Principal-Authorized Agent origination is a type of FHA origination by two FHA-approved mortgagees (neither of which is a loan correspondent).

The Principal-Authorized Agent relationship is used when the two FHA-approved lenders originate a loan together and both need access to the loan file in FHA Connection. In a Principal-Authorized Agent origination, the Principal must originate the loan, and the Authorized Agent must underwrite the loan.

The Final Rule changed Principal-Authorized Agent relationship originations to require that both lenders (Principal and Authorized Agent) possess unconditional direct endorsement approval. This requirement was to take effect Jan. 1, 2011. Subsequent analysis determined that many non-DE mortgagees need additional time to complete test cases for DE approval.

We have decided to provide a six-month extension (to July 1, 2011) for this requirement. This extension will allow sufficient time for most non-DE mortgagees to obtain unconditional DE approval to become Principal mortgagees in Principal-Authorized Agent originations of Title II single family loans.

Without this extension, these non-DE mortgagees will only be able to participate in the origination of single family loans on or after Jan. 1, 2011 as sponsored originators until they have obtained unconditional DE approval. All other changes to Principal-Authorized Agent requirements in the Final Rule will take effect Jan. 1, 2011, as previously announced in Mortgagee Letter 2010-20. FHA mortgagees that do not obtain unconditional direct endorsement approval by July 1, 2011, can no longer act as Principals. However, they may continue to pursue unconditional approval through the test case process and may participate in originations of FHA single family loans as sponsored Originators.

Temporary and Narrow Extension of FHA-Approval for Loan Correspondents–Extended to March 31, 2011, with conditions:
The final rule provides that FHA-approved Loan Correspondents may close FHA-insured mortgages in their names until Dec. 31, 2010. However, we have been advised that a significant number of Loan Correspondents have mortgage loans that have been assigned FHA case numbers but are unlikely to close by Dec. 31, 2010. A majority of these cases are due to uncertainty in the timing of the mortgage lending process which may be outside the control of the lender.

Since FHA will no longer be approving Loan Correspondents after Dec. 31, 2010, they will be statutorily prohibited from closing FHA-insured mortgage loans in their own names. If we do not extend that deadline, the inability of currently approved Loan Correspondents to close mortgage loans in their names will likely disrupt the loan processes of a significant number of lenders. This could negatively impact many borrowers who have already qualified for loans and who may be compelled to work with a new mortgage lender and incur additional costs.
Because of this, we are also granting a temporary extension of FHA-approval for currently approved Loan Correspondents with pipeline loans that meet certain criteria for the narrow purpose of allowing these loans to close in the Loan Correspondents’ names. This extension will extend FHA-approval of currently approved Loan Correspondents for the narrow purpose of permitting existing loans in their pipelines to close in their names.

This extension will only apply to loans in which a case number has been assigned and the loan has been approved by a DE underwriter as of Dec. 31, 2010. The extension will expire March 31, 2011.

The extension only applies to loans for which, as of December 31, 2010:

►(1) HUD has issued a firm commitment for insurance; or
►(2) A DE underwriter has approved the borrower for such loan (i.e. the lender has received and accepted approval via TOTAL Scorecard or has manually underwritten the loan).

This approval includes the DE underwriter review and approval of the appraisal. Loans eligible for this waiver must close by March 31, 2011. The FHA approval of all Loan Correspondents for all other purposes will expire on Dec. 31, 2010. All other pipeline loans that do not meet these criteria and have not closed prior to Jan. 1, 2011, must close in the name of an approved FHA Lender/Sponsoring Lender.

For more details on the waivers, click here.

These extensions are another example of our efforts to improve FHA’s policies so that we can continue to provide access to credit in today’s marketplace while at the same time recognizing the business needs of the lending industry. Thank you for your continued support of FHA and the mission we serve.

All loan modification lenders have expressed gratitude and even praised FHA’s home foreclosure prevention scheme. However, most creditors have expressed reservations for implementing the FHA loan modification program considering the loss it could cause to the investors in the event of appreciation of home prices in the near future. Instead lenders are contemplating optional refinance loan workouts. This has only necessitated the need for getting professional online services for struggling homeowners so that they could secure home refinance solutions that cater to their financial interests.

Many distressed homeowners have benefitted from the Obama home loan modification program. This has not just enabled them to save their homes from a possible foreclosure but also helped them save lots of dollars every month.

The “Making Home Affordable Program” or Home affordable modification program requires financial lenders to participate in the process of home mortgage refinance in exchange for incentives offered by the federal government through a $ 75 billion stimulus package. While most refinance mortgage creditors have praised the FHA’s foreclosure prevention scheme and expressed their gratitude to the Federal Housing Authority or FHA, but are skeptical about carrying on with the program. This is quite evident as many lenders have indicated that their preference to handle their own mortgage workouts.

With a view to arrest further downslide of the realty bubble the Obama administration announced the federal loan modification program with the backing of the FHA starting on October 1 to assist struggling house makers faced with financial hardships, who have gone upside down on their existing home mortgages to refinance their homes. To be eligible for the Government home refinance scheme, troubled borrowers are required to satisfy certain parameters, details of which could be garnered from the government loan modification website. However, at a congressional hearing in Washington, lenders expressed reservations about the federal home refinance plan and appeared to be less enthusiastic to carry on with the proposed federal scheme.

Very recently the Obama housing stimulus plan has been amended and under the tenets of the 2010 federal loan modification program, participation of financial lenders in refinancing delinquent mortgages is voluntary. Classically, the stimulus plan requires home loan refinance creditors to reduce loan balances to 90% of a home’s current market value. The new loans that would be backed by the FHA are scheduled to receive 5% of the new loan balance as a payment from the lender. It is precisely this feature that has served to voice critical concerns among many lenders who are hell bent on highlighting drawbacks of the “Hope for Homeowners” plan.

As per the new amendment in the FHA home loan modification program, the lenders fear that the investors in the loans could take a loss when the principal balance on a refinance loan amount is written down. This is because if prices of home were to recover in near future, creditors really don’t stand a chance to make up for the loss. It is this critical aspect of future home appreciation values that has made investors think of optional loan workouts such as making borrowers’ monthly payments affordable by reducing rates of interest on refinance home loans rather than writing down the loan principal. This means that the lenders could only use the federal home refinance alternative as the last resort, with a view to maximize profits for the investors.

But what does it imply for the trouble house makers? It only necessitates the need for online professional service guidance whenever they are out to apply for a loan modification of their current upside down home mortgages. This could help them in securing a much desired attorney backed loan modification so that their financial interests are well protected. However, it is recommended to use the expertise of reputed service providers like Refinanceitt. This could help them to obtain affordable as well as favorable home refinance loans that meet their financial needs.

The U.S. Department of Housing and Urban Development announced today that it is launching multiple investigations into the practices of certain mortgage lenders to determine if their home loan policies illegally deny qualified African American and Latino borrowers access to credit.

The investigations are in response to 22 complaints the National Community Reinvestment Coalition (NCRC) filed with HUD alleging that the loan activities of the mortgage originators showed that their home lending practices deny FHA- insured loans to African Americans and Latinos with credit scores as high as 640. Federal Housing Administration (FHA) guidelines allow mortgages to borrowers with credit scores above 580, provided the borrowers have down payments equaling 3.5 percent of the loan amount, or above 500, provided the borrowers have down payments equaling 10 percent of the loan amount.

“FHA is an important vehicle for Americans who want to purchase or refinance a home. We thank NCRC for bringing these complaints to HUD. For lenders to deny responsible home seekers this source of credit, without regard for their capacity to repay the loans, would raise serious fair housing concerns and, if proven, undermine our nation’s recovery efforts,” said HUD Assistant Secretary for Fair Housing and Equal Opportunity John Trasviña. “HUD will take appropriate action against any lender found to be engaging in discriminatory practices.”

Prior to the recent downturn in the economy, FHA-insured mortgages comprised less than three percent of new home loans. Since the economic crisis, FHA and the Government-Sponsored Enterprises have insured or guaranteed nearly 95 percent of new mortgage loans being originated. By the end of 2008, almost half of new home purchase loans and one quarter of new refinance loans were FHA or Veterans Administration (VA) insured.

According to NCRC, an association of more than 600 community-based organizations that promote access to basic banking services, their fair lending “testers” evaluated the practices of national lenders, financial services corporations, and other regional and local FHA-approved lenders. In the complaints filed on December 7, NCRC states that lenders were chosen according to their market share and volume of FHA loans, as well as through discussions with community leaders.

Under the Fair Housing Act, HUD impartially investigates allegations of housing discrimination and, during every phase of investigations, attempts to settle complaints through conciliation efforts.

FHA was created in 1934 and currently insures more than 6.5 million single family loans. 80 percent of loans insured by FHA in 2010 were to first-time homebuyers and more than 30 percent of home purchase loans were to minority homebuyers.

FHEO and its partners in the Fair Housing Assistance Program investigate more than 10,000 housing discrimination complaints annually. People who believe they are the victims of housing discrimination should contact HUD at 1-800-669-9777 (voice), 800-927-9275 (TTY).

The U.S. Department of Housing and Urban Development announced today that it is launching multiple investigations into the practices of certain mortgage lenders to determine if their home loan policies illegally deny qualified African American and Latino borrowers access to credit.

The investigations are in response to 22 complaints the National Community Reinvestment Coalition (NCRC) filed with HUD alleging that the loan activities of the mortgage originators showed that their home lending practices deny FHA- insured loans to African Americans and Latinos with credit scores as high as 640. Federal Housing Administration (FHA) guidelines allow mortgages to borrowers with credit scores above 580, provided the borrowers have down payments equaling 3.5 percent of the loan amount, or above 500, provided the borrowers have down payments equaling 10 percent of the loan amount.

“FHA is an important vehicle for Americans who want to purchase or refinance a home. We thank NCRC for bringing these complaints to HUD. For lenders to deny responsible home seekers this source of credit, without regard for their capacity to repay the loans, would raise serious fair housing concerns and, if proven, undermine our nation’s recovery efforts,” said HUD Assistant Secretary for Fair Housing and Equal Opportunity John Trasviña. “HUD will take appropriate action against any lender found to be engaging in discriminatory practices.”

Prior to the recent downturn in the economy, FHA-insured mortgages comprised less than three percent of new home loans. Since the economic crisis, FHA and the Government-Sponsored Enterprises have insured or guaranteed nearly 95 percent of new mortgage loans being originated. By the end of 2008, almost half of new home purchase loans and one quarter of new refinance loans were FHA or Veterans Administration (VA) insured.

According to NCRC, an association of more than 600 community-based organizations that promote access to basic banking services, their fair lending “testers” evaluated the practices of national lenders, financial services corporations, and other regional and local FHA-approved lenders. In the complaints filed on December 7, NCRC states that lenders were chosen according to their market share and volume of FHA loans, as well as through discussions with community leaders.

Under the Fair Housing Act, HUD impartially investigates allegations of housing discrimination and, during every phase of investigations, attempts to settle complaints through conciliation efforts.

FHA was created in 1934 and currently insures more than 6.5 million single family loans. 80 percent of loans insured by FHA in 2010 were to first-time homebuyers and more than 30 percent of home purchase loans were to minority homebuyers.

FHEO and its partners in the Fair Housing Assistance Program investigate more than 10,000 housing discrimination complaints annually. People who believe they are the victims of housing discrimination should contact HUD at 1-800-669-9777 (voice), 800-927-9275 (TTY).

There are reports concerning reductions in mortgage balances from Fannie Mae and Freddie Mac that could give more opportunities for homeowners who are having difficulty making their monthly mortgage payment obligation. Underwater home loans have been a problem for numerous individuals across the nation, and discussions between the government and Fannie Mae and Freddie Mac officials may lead these two mortgage institutions to offer homeowners not only the opportunity to find affordability in their underwater mortgage, but to transfer their home loan to an FHA mortgage.

While there has been underwater assistant plans available to Fannie Mae and Freddie Mac homeowners through the Home Affordable Refinance Program, there are many who feel more needs to be done concerning reducing mortgage balances on homes where a homeowner owes more than their home is actually worth. Reports have shown that many financial institutions which service mortgages have been unwilling to reduce principal balances, especially for homeowners who are still current on their payments.

The FHA short refinance program was proposed months ago and allows homeowners who were in a good position concerning their mortgage payments to refinance their underwater mortgage, receive a principal reduction, and enter into a more affordable FHA mortgage agreement. However, many felt that this program may provide lackluster results as financial institutions had to agree to offer an underwater mortgage principal reduction to homeowners, which again, is something that has not been widely available for homeowners who are current on their payments.

Hesitation on the part of Fannie Mae and Freddie Mac has typically centered around the fact that if homeowners whose loans are owned or guaranteed by Fannie Mae and Freddie Mac receive a principal reduction and are transferred to the FHA, this could lead to further losses for these mortgage institutions.

Yet, there are arguments that programs which offer principal reductions for underwater homeowners will be vital to the stability of the housing market as many homeowners, even those who are current on their mortgage, may fall into a situation where their mortgage becomes unaffordable or, as is evidenced by past occurrences, some homeowners have simply walked away from their underwater situation where no assistance was available.

Fannie Mae announced some changes to their loan guidelines. Some of the changes make it easier to get that home loan you’re looking for, while other make it tougher.

A word of warning here – the changes are Fannie guideline changes only. They do not reflect the so called “investor overlays” that are tougher than the normal program guidelines. Lenders place the tougher overlays onto the sponsoring loan program, Fannie in this case, to make the loans more attractive to investors. The sources of money in the mortgage chain – Mortgage Bankers and their banks that provide lines of credit to close loans – require that mortgage bankers follow these overlays as they do not want to fund loans that are un-sellable on the secondary market. This means that the mortgage secondary market is still not healthy and that we’ve not achieved a situation where money is flowing to market.

For the most part overlays are strikingly uniform, though there may be slight variations lender to lender. The best known overlay is the credit score requirement on FHA loans. FHA does not mandate a minimum credit score on its loans, though investors have overlaid one on FHA loans. The minimum started out at 580 and now is at 660.

Here are the changes Fannie announced:

Gift or grant funds of 5% are now acceptable from non-profits. This has always been a particular sore spot with sales agents, borrowers and lenders. While Fannie agreed to accept grant funds, extra diligence is required to determine if your lender will accept the grant. Also be aware that if mortgage insurance is required, the MI company may not accept the grant. Thus while your lender may take it, the MI company is another cook in the kitchen with veto power over the approval.

The tougher news is that Fannie adjusted its debt-to-income ratio down to 45% from 55%. Its also announced changes to the manner in which it would use debt in the ratio, when the debt has ten payments or less to payoff.

45% has been the norm with lenders, so this change does not impact most if not all mortgage programs. What is significant is that change to calculation of mortgage debt with less than 10 payments to run in the loan. Lenders have routinely exempted debt, revolving, mortgage, installment, etc., that could be paid off in less than 10 installments. This change seems to take this exemption away and force lenders to add the debt service back to the DTI calculation, making it tougher to qualify.

So while the DTI calculation is really a no-change, inclusion of the balances that could be paid off in 10 months represents closing of one of the last techniques loan officers were using to get loans approved. I wouldn’t even call it a loop hole.

Overall, this evidences the fact that the secondary market is still not anywhere it needs to be.

Federal Housing Administration Commissioner David Stevens said early indications of a review into mortgage servicer operations has shown they are not meeting the loss mitigation needs of the Department of Housing and Urban Development.

Stevens testified before the House Financial Services Committee Thursday on the recent foreclosure issues that have surfaced in many banks. Lenders such as Bank of America (BAC: 11.61 +2.83%), JPMorgan Chase (JPM: 39.11 +2.52%), Ally Financial (GJM: 22.6299 +0.89%) and Wells Fargo (WFC: 28.62 +3.96%) are resubmitting affidavits allegedly signed by employees en masse without a review of the documentation as required by law in some states.

Stevens said when he first entered office in 2008 significant reviews into servicers were not being done. So, in May, the FHA launched a review of several of its largest servicers that, combined, accounted for over 70% of HUD’s single-family servicing portfolio.

“The early returns suggest that some servicers may be falling short – that in varying degrees many of the servicers under review may not have met HUD’s expectations in assisting borrowers through the loss mitigation process,” Stevens said.

He added that FHA analysts have found some servicers even lack knowledge of the FHA loss mitigation process, necessary technology and enough experienced staff necessary to clear modification request backlogs.

Ally Financial’s chief of mortgage operations said the bank is refiling the affidavits and bringing in outside counsel to review processes.

Stevens said a review of one unnamed servicer yielded $700,000 in administrative fees. On the origination side, the FHA has withdrawn approval for over 1,500 lenders and imposed more than $4.2 million in penalties. As his office turns its attention to servicers, he warned that more action could be coming.

“If you don’t operate ethically and transparently, we will not do business with you, and we will not hesitate to act,” Stevens said.

Federal Housing Administration Commissioner David Stevens said early indications of a review into mortgage servicer operations has shown they are not meeting the loss mitigation needs of the Department of Housing and Urban Development.

Stevens testified before the House Financial Services Committee Thursday on the recent foreclosure issues that have surfaced in many banks. Lenders such as Bank of America (BAC: 11.225 -0.75%), JPMorgan Chase (JPM: 37.49 -1.11%), Ally Financial (GJM: 22.55 +0.62%) andWells Fargo (WFC: 27.0901 -0.40%) are resubmitting affidavits allegedly signed by employees en masse without a review of the documentation as required by law in some states.

Stevens said when he first entered office in 2008 significant reviews into servicers were not being done. So, in May, the FHA launched a review of several of its largest servicers that, combined, accounted for over 70% of HUD’s single-family servicing portfolio.

“The early returns suggest that some servicers may be falling short – that in varying degrees many of the servicers under review may not have met HUD’s expectations in assisting borrowers through the loss mitigation process,” Stevens said.

He added that FHA analysts have found some servicers even lack knowledge of the FHA loss mitigation process, necessary technology and enough experienced staff necessary to clear modification request backlogs.

Ally Financial’s chief of mortgage operations said the bank is refiling the affidavits and bringing in outside counsel to review processes.

Stevens said a review of one unnamed servicer yielded $700,000 in administrative fees. On the origination side, the FHA has withdrawn approval for over 1,500 lenders and imposed more than $4.2 million in penalties. As his office turns its attention to servicers, he warned that more action could be coming.

“If you don’t operate ethically and transparently, we will not do business with you, and we will not hesitate to act,” Stevens said.

Home ownership may be falling out of reach for more Americans as lenders toughen their standards for Federal Housing Administration-insured loans beyond what the agency itself requires.

Mortgage lenders including Wells Fargo & Co. and Bank of America Corp., the two largest, have raised the minimum credit score on FHA-insured loans that they will buy to 640 from 620. About 6.3 million people fall within that range, according toFICO, which created the formula for the ratings.

The higher hurdles for FHA loans, used in about a fifth of U.S. home purchases, add to challenges for a housing market already struggling with record-low sales and surging foreclosures. While lax lending fueled the bust that led the U.S. into recession, the new requirements will stifle the real estate recovery needed to revive the economy, said Ron Phipps, president of the National Association of Realtors.

“We’ve gone from silly to stupid,” Phipps, principal partner ofPhipps Realty Inc., said in a telephone interview from his home in Warwick, Rhode Island. “People who should be getting credit can’t get it. To have a healthy real estate market, you need activity. You need transactions.”

FHA Rules

The FHA, which previously didn’t have minimums for FICO scores, began in October to requiregrades of at least 500, and more than 580 for loans with down payments of as little as 3.5 percent. Borrowers with scores between those levels must put 10 percent down. Several lenders moved minimums to about 620 at the start of 2009, the companies said then.

FICO scores range from 300 to 850. The grades are based on data such as whether borrowers have missed debt payments, balances on their credit cards relative to borrowing limits, and the length of their credit history, meaning consumers who’ve never fallen delinquent can have lower scores, according to the company’s website.

The 6.3 million people with grades between 620 and 640 equate to about 3.7 percent of U.S. consumers with credit information available, according to FICO, the Minneapolis-based company formally known as Fair Isaac Corp.

Requiring a 640 credit score excludes as much as about 15 percent of FHA borrowers, David Stevens, the agency’s commissioner, said in an interview yesterday. Minorities and borrowers in communities hardest hit by the recession are most likely to lose based on FICO scores, he said.

Finding Better Way

“We are restricting opportunity and access for those who can least afford it,” Stevens said. “We need to find a better way to provide access to these families who are being cut out simply because lenders are putting arbitrary overlays on top of our requirements.”

FHA insurance covers lenders or debt investors when borrowers default. One of every five U.S. home purchases relied on the loans in the fiscal year through July, the agency said in a reportyesterday. They accounted for a third of purchases by first-time homebuyers in the year ended Sept. 30.

The FHA, the Department of Veteran Affairs and Fannie Mae and Freddie Mac, the companies taken over by the government in 2008, have been providing about 95 percent of new mortgage financing after falling home prices sparked retreats by banks and by investors in mortgage bondswithout U.S.-backed guarantees, according to Inside Mortgage Finance newsletter. The S&P Case-Shiller Index of property values in 20 cities fell as much as 33 percent from its 2006 peak.

Larger Role

“It’s absolutely clear that, today, FHA is playing a larger role than it should,” Stevens said during a conference call with reporters yesterday. “But it’s a counter-cyclical force providing liquidity in a market where private capital still is completely absent.”

Mortgage companies are tightening FHA standards partly because of the higher costs they face in servicing delinquent loans, said Luke Hayden, president of the mortgage unit of Mount Laurel, New Jersey-based PHH Corp. By keeping defaults low, they can also boost the prices they fetch for bonds filled with the loans and thus offer lower rates, he said.

When FHA-backed loans go into default, the lender bears a greater share of the expenses than when the mortgage is backed by Fannie Mae and Freddie Mac, Hayden said. Lenders whose delinquency rates stray too far from averages can also face being cut off by the FHA or other sanctions from the agency, said David Lykken, president of Mortgage Banking Solutions, an Austin, Texas-based consulting firm.

Lender Buybacks

With Fannie Mae and Freddie Mac mortgages, lenders are forced to buy back bad mortgages that were improperly underwritten, which has also prompted them to adopt tougher guidelines for those loans.

More banks tightened standards on prime residential mortgages in three months ending Oct. 31 than loosened them, a switch from the prior period, a Federal Reserve survey found.

Hayden’s company, the country’s seventh-largest home lender, gets some of its business through a joint venture with its former affiliate Realogy Corp., owner of the Coldwell Banker, ERA and Century 21 realty brokerage brands. The company is still tightening some standards for government-insured loans, he said.

Wells Fargo, the largest mortgage originator, has stopped buying FHA loans with FICOs below 640 from other lenders, said Vickee J. Adams, a spokeswoman for the San Francisco-based bank.

The minimum score for mortgages it makes through its own loan officers remains 600 with “no plans for an increase,” she said. These types of loans accounted for 57 percent of its first-half originations, according to Inside Mortgage Finance.

Bank of America

Bank of America, the second-biggest lender, also stopped buying new FHA loans with FICOs below 640 last month, said Terry H. Francisco, a spokesman. About half of its originations in the first half of this year came through purchases from such so- called correspondents.

The bank, based in Charlotte, North Carolina, also requires scores at least that high on FHA mortgages for refinancing when making loans directly to borrowers. It still allows scores as low as 620 for home-purchase mortgages in its retail business because it thinks they perform relatively better and “we want to stay competitive” with those loans, Francisco said.

While Bank of America and Wells Fargo are keeping their retail credit standards in place, the changes to their loan buying affects other lenders’ requirements. Quicken Loans Inc., the ninth-largest lender, has ended most of its FHA lending to borrowers with scores below 640 because of the new rules.

‘Huge Effect’

“When the big companies change their standards and rules, it has a huge effect on the market,” said Bob Walters, chief economist at the Detroit-based company.

JPMorgan Chase & Co., the third-largest lender, had already been generally requiring credit scores of at least 640 on FHA loans before the tightening by competitors, said Tom Kelly, a spokesman for the New York-based company.

Matt Hackett, underwriting manager at New York-based Equity Now Inc., said higher requirements among buyers of its FHA loans cut off about 5 percent of his potential customers. A 640 score disqualifies about 15 percent of customers who were getting FHA loans through Chris Murphy, a loan originator at Main Street Home Loans LLC, an independent mortgage bank based in Alpharetta, Georgia.

“It’s bad from the originator’s standpoint because fewer people qualify,” Murphy said in a telephone interview from his office in Charlotte. “But it’s less likely they’re going to default and so, from the standpoint of the economy, it’s probably a good thing.”

Mortgage Delinquencies

About 9.8 percent of U.S. home mortgages were delinquent at the end of the second quarter, with an additional 4.6 percent in the foreclosure process, according to the Mortgage Bankers Association. The Washington-based group releases figures through Sept. 30 tomorrow.

FHA lending to the riskiest borrowers has declined in the past two years. Only 3.8 percent of FHA loans had scores below 620 or no score in the quarter ended Sept. 30, down from a peak of 50.4 percent in the period through Dec. 31, 2008, according to a Nov. 4 agency report to Congress. A score below 620 was typically considered subprime before the credit crisis, meaning the borrower had a bad or limited credit history.

More Than Expected

“Mortgage credit availability has tightened even more than we expected,” Morgan Stanley analysts Oliver Chang, Vishwanath Tirupattur and James Egan said today in a report.

At the same time, the recession and unemployment has spurred a decline in borrower credit scores, they said. There has been about a 23-point drop in FICO scores among current borrowers who took loans without government backing in 2006 and 2007, they said.

The U.S. home-ownership rate remained at a 10-year low of 66.9 percent in the quarter ended Sept. 30, in part because of rising foreclosures, the U.S. Census Bureau reported Nov. 2. The rate reached a record high of 69.2 percent in the second and fourth quarters of 2004.

Sales of existing homes were at an annual pace of 4.53 million in September, compared with the average rate of 5.82 million for the past decade, according to the Chicago-based National Association of Realtors. The pace in July was 3.84 million, the lowest in data going back to 1999.

Restricting access to credit threatens to slow a rebound even as reduced home prices and interest rates near record lows boost affordability, said Stevens, the FHA commissioner.

“This has a broad potential impact to the economic recovery in total,” he said. “We’re not asking for lenders to be reckless. In fact, we believe we have prudent policies for the market. But we do believe that lenders need to put more work into making certain that they provide accessibility for families who can qualify for a mortgage.”