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·         JANUARY 19, 2010, 7:38 P.M. ET

By NICK TIMIRAOS

The Federal Housing Administration will announce more stringent lending requirements on Wednesday to cushion against rising defaults and to stave off the need for a possible taxpayer bailout.

The FHA, which has taken on a major role in the housing market during the economic downturn, doesn’t lend money to home buyers, but insures lenders against default on loans that meet FHA criteria. In exchange for that backing, borrowers who take out FHA-backed loans must pay an upfront insurance premium, which is currently set at 1.75% of the total loan amount, or $1,750 on a $100,000 loan.

The FHA is set to raise that fee to 2.25%, the second increase in the last two years, according to people familiar with the matter. If the larger upfront fee had been in place last year, the FHA would have boosted its reserves by more than $1 billion. The value of those reserves, after projected losses, has fallen to $3.5 billion. Also to boost the reserve, the FHA also will ask Congress to increase a separate insurance fee that borrowers pay annually, people said.

FHA officials declined to comment.

The FHA, which backs up to half of all new loans in certain housing markets, has come under fire for insuring loans with little or no money down as home prices plunged over the past three years, and its reserves have fallen to razor thin levels. That is forcing the agency to walk a tightrope between protecting taxpayer dollars and helping to facilitate the housing recovery.

The FHA will keep minimum down payments at the current 3.5% level for most borrowers. But the agency will require riskier borrowers with credit scores below 580 to make a minimum 10% down payment. While the FHA doesn’t have a credit score cutoff, most lenders require a minimum 620 credit score.

Some housing analysts have pushed for higher down payments on FHA-backed loans, and a bill in Congress would raise down payments to 5%, from the current 3.5%.

Instead, the FHA will reduce the amount of money that sellers can kick in for closing costs, to 3% of the sale price, down from the current level of 6%. The higher cap led to abuses where sellers “heavily marked up the purchase price,” says Lou Barnes, a mortgage banker in Boulder, Colo.

The FHA is also set to announce a series of measures to boost its ability to oversee and take action against lenders that originate loans with FHA backing.

“Mortgage lenders will find the new rules painful but necessary,” says Howard Glaser, an industry consultant. He says the rules were overdue given that “an ‘anything goes’ environment” had prevailed in recent years as former subprime brokers migrated into FHA-backed loans.

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Howard Glaser

hglaser@glasergroup.net

(202) 277-2336

Contact real estate writer Alan J. Heavens at 215-854-2472 or aheavens@phillynews.com.

By Dina ElBoghdady
Washington Post Staff Writer
Thursday, October 29, 2009

The Senate has reached a broad bipartisan consensus on extending a lucrative tax credit for first-time home buyers beyond the Nov. 30 deadline and expanding it to include some current homeowners, according to the Senate’s Democratic leader.

Under the plan, people buying their first home would receive an $8,000 tax credit if they sign a contract by April 30 and close on it by June 30, according to people familiar with the proposal who spoke on the condition of anonymity because the timing had not been finalized. Homeowners shopping for a new primary residence would be eligible for a $6,500 tax credit if they owned their home for five consecutive years in the previous eight.

In both cases, individuals who earn more than $125,000 annually and couples who earn more than $250,000 would not be eligible, the office of Senate Majority Leader Harry M. Reid (D-Nev.) said on Wednesday.

Reid and other supporters of the tax credit hope to attach their proposal to an unemployment benefits bill that may reach the Senate floor this week if lingering issues are resolved about whether to also include two unrelated Republican amendments. “We do expect this tax credit plan to be considered as a part of the unemployment bill at some point,” said Regan Lachapelle, a spokeswoman for Reid.

The proposal is the latest of several regarding the tax credit that have been floated in recent days. Reid and others have been trying to cobble together a plan that would appeal to fiscal conservatives who have balked at the cost of the tax refund program and want it to lapse by the end of next month, as scheduled.

On Wednesday, Senate Minority Leader Mitch McConnell (R-Ky.) said there is wide backing for the latest plan among Republicans, saying that “most members” support it and the underlying unemployment measure. But Don Stewart, his spokesman, warned that nothing is a done deal. “Everything is fluid” until there is unanimous agreement on what will reach the Senate floor, Stewart said.

The tax credit was enacted early last year to help jump-start the housing market. Real estate industry officials say it has helped boost sales and clear out a glut of lower-priced homes, including foreclosures, which have helped drag down home prices.

But the program’s staunchest critics, including some economists, argue that most of the people who received the tax credit would have bought homes anyway.