A proposed policy that cuts the maximum seller concessions in half on residential transactions financed with government mortgages has been revised in response to strong public feedback.
Seller-paid closing costs on mortgages insured by the Federal Housing Administration are limited to 3 percent based on a proposal by the Department of Housing and Urban Development. But a revision to the proposal extends the limitation to the greater of 3 percent or $6,000.
Current regulations allow up to 6 percent to be paid by the seller.
Reducing the limit on seller-paid fees will align FHA policy with the rest of the market, according to HUD. Conventional loans are limited to 3 percent, while mortgages guaranteed by the Department of Veterans Affairs are capped at 4 percent of the sales price.
Statistical data cited in a July 2010 notice reportedly illustrated how loans to borrowers who received more than 3 percent in seller concessions generated more losses than those with 3 percent or less in fees paid by the seller.
HUD explained, “Seller concessions include any payment toward the borrower’s closing costs and other fees, by any third party with an interest in the transaction, including the seller, builder, developer, mortgage broker, lender, or settlement company.”
The revised definition removes homeowners association fees, mortgage interest payments and mortgage payment protection plans, among other payment supplements, from acceptable seller concessions.
Closing costs, prepaid expenses and discount points were already considered acceptable concessions when paid by the seller. Interest-rate buydowns were also in this category.
The proposal adds up-front mortgage-insurance premiums to the list of items that fit the acceptable definition of seller concessions.
“All other third-party contributions are considered inducements to purchase, resulting in a dollar-for-dollar reduction to the lesser of sale price or appraised value before applying the appropriate LTV factor (96.5 percent),” the notice stated. “This excludes closing costs and prepaid items paid by the lender through premium (rebate) pricing.”
The $6,000 limit can increase each year at the same rate as the FHA national loan limit floor.
The housing agency will accept comments on Thursday’s revised proposal for 30 days.
The reduction in seller-paid fees was one of three initiatives to restore the Mutual Mortgage Insurance Fund that HUD proposed in July 2010. That proposal generated 902 public comments from lenders, Realtors and home builders as well as other interested organizations during the 30-day public comment period.
Most of the comments were about the limitation on seller concessions. The strong response prompted HUD to delay the implementation of that initiative. After considering the feedback, the limitation was extended by adding the $6,000 maximum — which eases requirements for FHA borrowers in lower-priced neighborhoods since some fees are fixed regardless of the purchase price.
In September 2010, HUD published a final rule implementing a minimum credit score of 500 as of October 2010 and cutting the maximum loan-to-value ratio to 90 percent on FHA-insured loans for borrowers with credit scores less than 580.
HUD said it is in the process of implementing a third initiative that tightens standards on manually underwritten loans. That initiative is expected to reduce risk while ensuring that borrowers are offered sustainable loans.
FHA market share was 17 percent during its fiscal-year 2010. Three years earlier, in 2007, FHA only captured 3.4 percent of the market.
