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Friday, March 9, 2012

FHA's new limits on financial concessions from sellers to buyers

FHA's new limits on financial concessions from sellers to buyers
Commentary: New FHA restrictions seek to reduce agency's own risk of loss
By Ken Harney
Inman News®

The Federal Housing Administration's long-awaited rules on how much home sellers can contribute to buyers' closing costs are finally out -- sort of.

Rather than publishing final guidance on "seller concessions," the agency put out a Federal Register notice late last week saying, essentially: "OK folks, here's what we plan to do -- but if you don't like it, we'll give you just 30 days to tell us why."

As forecast in an earlier column (see "FHA may lower cap on seller concessions to buyers"), the almost-final rule abandons the agency's previous plan to impose a flat 3 percent, across-the-board limit on settlement cost contributions by sellers that sweeten buyers' deals.

That approach was strongly criticized by the National Association of REALTORS® and by prominent regional realty brokers as penalizing buyers and sellers in markets with low to moderate home-sale prices.

Limiting seller assistance to just 3 percent would smother sales, brokers complained, because many closing costs are fixed and represent a larger percentage of the bottom line in moderate-priced transactions compared with higher-cost sales.

To remedy this, FHA officials now say the agency intends to adopt a more nuanced approach under which the maximum allowable seller contribution can be the greater of $6,000 or a percentage of the selling price, based on a sliding scale.

In some cases, the current 6 percent cap will remain. In many others, it will dip far below 3 percent and become a tiny fraction of what is allowed today.

For example, in the sale of a $100,000 home, the maximum seller concession would be $6,000, or 6 percent, under the new rule -- the same as it is today.

On a $120,000 purchase, it would be 5 percent ($6,000 is 5 percent of $120,000). At a $140,000 selling price, the $6,000 cap would be 4.3 percent; at $180,000 it would be 3.3 percent. At $200,000, the $6,000 cap would equal 3 percent, but would still be one-half the $12,000 (6 percent) limit currently allowed.

All higher sales amounts would be progressively more severely restricted by the 3 percent limit. For instance, on a $300,000 home purchase the present FHA rule would allow a seller to kick in as much as $18,000, but under the new cap that assistance could not exceed $6,000 -- far below even a 3 percent limit, which would total $9,000.

In effect, FHA wants to rein in what it sees as unacceptable distortions of the true property value -- and therefore its own risk of loss in the event of a default -- as transaction prices rise.

Left at its current 6 percent across-the-board approach, FHA noted, sellers can throw in as much as $43,785 in financial inducements to buyers in high-cost areas such as California, New York and Washington, D.C., where the maximum conforming loan limit is $729,750.

Fannie Mae and Freddie Mac have long limited seller contributions to a flat 3 percent of the selling price. The U.S. Department of Veterans Affairs allows 4 percent.

In its proposed rule, FHA also took aim at certain types of seller assistance -- particularly those offered by some builders to bring buyers to the settlement table.

No longer permissible under FHA's revised definitions are seller concessions involving advance payment of homeowner association fees, advance payment of mortgage interest for a period of months, and "mortgage protection plans," where borrowers receive insurance policies free of direct charge that guarantee up to six months of mortgage payments in the event of an unforeseen job loss or medical disability.

"HUD believes that these types of payment supplements, while permissible under current seller-concession guidelines, are really inducements to purchase and should be treated as such," the agency said in its proposal.

To the extent that builders or other sellers continue to make such offers to buyers, FHA intends to subtract them, dollar for dollar, from the sale price of the house before calculating the loan-to-value limit on the insurable mortgage amount.

Still acceptable to FHA under the proposed changes:
•actual closing costs;
•prepaid expenses;
•loan discount points; and
•the upfront mortgage insurance premium charged by FHA.

Though NAR has not commented publicly yet on the FHA proposals, homebuilders are unhappy with the rollbacks and new restrictions.

"This is going to impinge on (builders') ability to sell homes," David Ledford, senior vice president for regulatory affairs at the National Association of Home Builders, told me.

Worse yet, he said, FHA is planning to change the rules "at a very inopportune time" in the market cycle, "just when there are 'green shoots' " of recovery sprouting up -- in the form of higher traffic and slowly increasing sales -- in markets around the U.S.

In particular, he added, many builders now routinely offer to pay a limited period of homeowner association dues for their buyers, but now they may have to cut that practice.

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