The Associated Press reported Jan. 19 that the federal agency that insures a large portion of mortgages extended to first-time homebuyers is raising its standards.

The Federal Housing Administration is raising fees and
tightening lending standards to shore up its strapped finances and avoid a
taxpayer bailout.

The government agency has seen its losses rise with the foreclosure rate.
Its reserves have sunk below the minimum level required by Congress. A
healthy FHA is vital for the housing market because it insures roughly 30
percent of new loans, and is the largest backer of mortgages to first-time
buyers.

The changes, which will go into effect in the first half of the year, “are
among the most significant steps to address risk in the agency’s history,”
FHA Commissioner David Stevens said in a prepared statement.

The FHA does not make loans, but rather offers insurance against default.
Borrowers are willing to pay for the insurance because FHA loans only
require down payments of 3.5 percent of the purchase price — and that didn’t
change.

The new policies, to be announced Wednesday, are designed to bring more
revenue into the agency, while at the same time keeping loans available.

Under the changes, homebuyers will:

—Pay an upfront mortgage insurance premium of 2.25 percent of the total loan
amount, up from the current level of 1.75 percent. A borrower taking out a
$200,000 mortgage would pay a $4,500 fee, for example, rather than the
current fee of $3,500. Borrowers will still be able to wrap these fees into
the total amount borrowed. FHA officials also plan to ask Congress to
increase the maximum annual premium that FHA can charge.

—Need a credit score of at least 580 to qualify. Many FHA lenders already
require a higher score, but there had been no standard requirement across
the program. Borrowers with a score lower than 580 will need a down payment
of at least 10 percent.

The changes come as borrowers with loans backed by the agency have
increasingly been falling into default. More than 18 percent of FHA
borrowers are at least one payment behind or in foreclosure, compared with
14 percent for all loans, according to the Mortgage Bankers Association.

Mortgage lenders “will find the new rules painful but necessary,” said
Howard Glaser, a mortgage industry consultant and former housing official
during the Clinton administration.

There also have been fears that unscrupulous operators have shifted their
business to the FHA after the subprime business went bust. Last week, the
agency served subpoenas on 15 mortgage companies with suspiciously high
default rates for FHA loans, part of a broad crackdown on dubious lenders.

The agency has already taken action against several problem lenders. One of
the nation’s biggest mortgage bankers, Taylor, Bean & Whitaker Mortgage Co.
of Ocala, Fla., was banned from the FHA program in August and filed for
Chapter 11 bankruptcy protection. Another mortgage company, Lend America,
was kicked out in