Small Business Lending Fund and Stricter FHA

by Joel Barkman

The Federal Housing Administration (FHA) has proposed tighter underwriting requirements for its single-family mortgage loan program.

Released last month, the proposed changes include reducing the current 6 percent limit on seller concessions to 3 percent, tightening underwriting standards on loans that are underwritten manually and requiring minimum credit scores.

These initiatives were originally announced on Jan. 20 as part of FHA measures to reduce risk and bolster capital reserves.

Since the downturn in the housing market, the FHA has become the primary source of mortgage credit for underserved borrowers - primarily first-time home buyers, minorities and those with limited down payment capabilities - as other sources of mortgage credit have disappeared.

In a letter to Secretary of Housing and Urban Development Shaun Donovan in January, the National Association of Home Builders (NAHB) raised concerns about FHA's underwriting changes. The association has also met with FHA Commissioner David Stevens to discuss the implications of the tightening and has surveyed its members on the potential impact of reducing seller concessions.

The FHA has said that the proposed reduction in seller concessions will bring its limits more in line with industry standards and reduce risk. NAHB is concerned that this move would not be in the best interest of home buyers, particularly first-time buyers, who would see an increase in the amount of upfront funds they need to purchase a home.

Now is the wrong time to be reducing seller concessions, NAHB has said, and FHA should be able to sufficiently manage risk and remain financially sound by properly evaluating the creditworthiness of borrowers and following its current underwriting guidelines.

At a time when a housing upturn is needed to sustain economic recovery, reducing seller concessions will only add additional barriers to homeownership, according to NAHB. Current seller concession guidelines provide a viable way to reduce home buyer costs and should be used as an incentive to help reduce current housing inventories.

NAHB will be raising these and other concerns in its comments on the proposed policy changes, and is seeking input from association members on all aspects of the notice. This, coming at the same time as a debate over language in the proposed Small Business Lending Fund that may leave local small builders on the outside looking in.

The Senate late last month began debate on a bill that would establish a $30 billion lending program for small businesses. While prospects for passage of the bill are uncertain, the chamber did vote on a procedural motion to include the new lending fund in the overall small business bill. In a legislative victory for NAHB, the House voted 418 to three to ensure that builders would have the same access as other small businesses to the loan program created by H.R. 5297, the Small Business Lending Fund Act of 2010. With NAHB expressing strong opposition, the Senate leadership late on Thursday, July 22, found just enough votes to move forward on an amendment offered by Sens. George LeMieux (R-Fla.) and Mary Landrieu (D-La.) that includes the fund but does not allow it to be used to provide construction loans to small builders.

In a "key vote" letter sent to every member of the Senate, NAHB stressed that without language providing equal access to this program for the nation's small builders, the amendment does not adequately address the small business lending concerns currently facing the nation.

NAHB noted that housing was the first sector hit by the current economic crisis, and that recovery cannot be sustained without a revival of the housing industry.

Remember, what's good for housing is also good for our homes - and our neighborhoods and our communities - just "Ask a Builder."

As always e-mail your questions or comments to joel@goldenrulebuilders.com or write to "Ask a Builder" at P.O. box 294, Catlett, VA 20119.

Barkman is past president of the Fauquier Chapter of The Northern Virginia Building Industry Association.

Read Joel's column weekly in the