Changes in a major government mortgage insurance program heavily used by first-time home buyers will knock thousands of families nationwide out of the home buying market, at least for now.
The changes in Federal Housing Administration rules for single-family homes are a result of the National Affordable Housing Act and Omnibus Budget Reconciliation Act enacted late last year.
Concerned with stemming losses in the FHA insurance fund, officials at the U.S. Department of Housing and Urban Development, operator of the FHA program, sought to reduce the number of defaults by raising a home buyer's equity in a property. The net effect will be to require most home buyers to have more up-front cash. The new rules also no longer allow FHA financing to be used to buy vacation homes and freeze the mortgage ceiling at $124,875.
The impact of the changes will be greatest in areas with the highest closing costs, which includes Maryland.
William Brewster, assistant director for residential finance for the Mortgage Bankers Association of America, estimated that a typical borrower in Maryland would need between $900 and $1,500 in additional cash under new guidelines that take effect ,, Sunday.
Judy Wheatley of Columbia-based First Advantage Mortgage Corp, a subsidiary of First American Bankshares, agreed with Brewster's estimates.
A test analysis she did on a $75,000 new home in Anne Arundel County showed that a buyer would need an additional $1,200 in cash, she said. Closing costs generally are higher for new houses because the buyer pays the entire transfer and recording tax.
"It's going to make a significant difference," she commented. "We're scurrying right now to get as many FHA loans approved as we can before the Feb. 17 deadline."
What's more, the addition of an annual mortgage-insurance premium, which FHA officials expect to begin in April, will add an average of $30 to $40 to monthly payments.
Estimates of how many potential homebuyers will no longer currently qualify for the FHA program range from a low of 20,000 by HUD to as many as 100,000 by the Realtors' main trade group. HUD, in fact, takes the position that the 20,000 people it estimates are affected are merely being delayed.
"What we're saying is that it would take them longer to save more," said Bill Glavin, a department spokesman.
"I think very clearly the impact will be to penalize the marginal buyer, the one on the border between renting and owning," countered John Tuccillo, senior vice president of real estate finance and chief economist for the Chicago-based National Association of Realtors.
Tuccillo said the group voted at its recent semi-annual meeting to ask Congress for a moratorium in the changes because of the recession and the severe downturn in the housing industry.
According to the NAR's Residential Mortgage Finance Panel Survey, 28 percent of all mortgage loans in 1990 were under the FHA program. Of that 28 percent, 62 percent were first-time home buyers, said Catherine Logsdon, research economist.
The group's reported yesterday that its first-time home buyer affordability index measured 81.5 for the fourth quarter of 1990, meaning the typical entry-level buyer had 81.5 percent of the income needed to qualify to buy the typical starter home.
The index was up from 75.7 in the previous quarter and the highest since it measured 83.9 in the first quarter of 1978. But it remained 29.7 percent lower than the 115.9 index measuring the affordability of all buyers of existing homes.
At the same time, the national median price of a starter home fell 5.1 percent, from $82,100 to $77,999, while the median income of prime first-time buyers inched up $291, from $24,137 to $24,428, the NAR said.
Gerry Glavey, an insured housing specialist in HUD's regional bTC Philadelphia office, said that in four months -- between Oct. 1, 1990 and Jan. 31 -- FHA insured 6,148 mortgages in Maryland, excluding Price George's and Montgomery counties.
The changes cap the maximum base loan for homes over $50,000 at 97.75 percent of the property's appraised value or sales price -- whichever is less. Previously, allowable closing costs were often financed as part of the mortgage. While home buyers elsewhere in the country still may be able to finance part of their closing costs, very few in Maryland will be able to do so because closing costs here are among the highest in the nation.
"As closing costs increase, chances are better for people having to come up with more money," Glavey said.
Also, beginning in April, FHA mortgage holders will have higher monthly payments because of an annual mortgage insurance premium. That will be in addition to the one-time, up-front charge, currently 3.8 percent. The annual charge, which will amount to 0.5 percent of the outstanding mortgage, will be pro-rated over 12 months and become part of a homeowmer's monthly payments.
How long a home buyer will pay the monthly charge will depend on his down payment. In fiscal 1991 and 1992, a buyer who puts more than 10 percent down will pay for 5 years while a buyer who puts less than 5 percent down will pay for 10 years.
By fiscal 1995, the up-front charge, which can be financed beyond the base loan amount under FHA, will drop to 2.25 percent, but the monthly payments will be greatly extended. Those who put more than 10 percent down will pay for 11 years while all other borrowers will pay for 30 years, the life of the mortgage.
Wheatley said that while the monthly charge would have a minimal impact on most buyers, those with just enough income to handle a monthly payment might find they no longer qualify for a mortgage. And those who can qualify for a conventional low-downpayment mortgage guaranteed by a private insurer will that route because it will be cheaper than FHA, she said.
"It will probably increase the foreclosure rate because the people who are going to take the FHA are going to be the less credit-worthy," she said. "I think they shot themselves in the foot."
Irene Waltemeyer, a Realtor in Prudential's Harford South office in Belair, said the new rules not only put homes beyond the reach of some buyers but also make the process more difficult.
The prequalifying process, she said, will require much more detail before home shoppers even get to look at houses.
"It's the area where people need more help and they've made it more complicated," she complained.
Her market, she said, involves many first-time home buyers, and Harford offers a wide selection of houses priced under the
$124,875 maximum for FHA mortgages.
"Just about all the townhouses, all the attached housing comes under that category," she said. "Young couples may have the income, but they have to buy cars and they haven't had an opportunity to save" enough for a conventional mortgage.
"They're not only hit cash-wise but qualifying-wise," she said. What's more, she added, young couples starting out often need to buy furniture when they buy a home.
"It's just taking cash out of their pockets," she said.