February 27, 2012
This week the US Department of Housing and Urban Development (HUD) announced a proposed rule on permitted seller concessions for loans insured by the Federal Housing Administration (FHA). This proposed rule is one of three initiatives HUD is undertaking to contribute to the restoration of the Mutual Mortgage Insurance Fund (MMIF). Similar to what was proposed in the President’s budget, the rule limits concessions to 3 percent or $6,000, whichever is greater. It also limits acceptable use of concessions to borrower closing costs, prepaid items, discount points, the FHA Upfront Premium, and interest rate buydowns. The seller concession cannot exceed the actual closing costs prohibiting cash to the borrower at closing. Comments are due March 26, 2012.
When the rule was initially proposed in 2010 HUD was working to reduce permitted concessions from 6 percent to 3 percent with no $6,000 cap. NAR took a position that permitted concessions should be on a sliding scale between 3 and 6 percent and offers a distinction between new construction and existing homes. NAR also argued that reducing permitted seller concessions will have a greater impact on states with higher than average closing costs such as New York and Texas. NAR also noted that claims rates for FHA transactions involving seller concessions had dropped. In 2003, 10 percent of transactions involving seller concessions above 3 percent resulted in claims to FHA. However, by 2008 only 1.7 percent of these transactions resulted in claims.