WASHINGTON — America’s Credit Unions, the Defense Credit Union Counciland nine other housing and financial services trade groups are urging the Federal Housing Administration to modernize its decades-old property standards for single-family mortgages, arguing the current rules unnecessarily increase costs, delay closings and make FHA-backed loans less competitive for homebuyers.
In a joint letter submitted to the Department of Housing and Urban Development in response to a request for information on FHA’s Single-Family Minimum Property Requirements (MPRs), the organizations called on the agency to align its standards with those used by government-sponsored enterprises Fannie Mae and Freddie Mac.
The June 29 letter was signed by America’s Credit Unions, the Defense Credit Union Council, the American Bankers Association, Community Home Lenders of America, the Housing Policy Council, Independent Community Bankers of America, Mortgage Bankers Association, National Association of Mortgage Brokers, National Association of Realtors, Broker Action Coalition and Collateral Risk Network.
Support for Order
The groups said they support the Trump administration’s March executive order, “Promoting Access to Mortgage Credit,” and praised FHA for seeking industry input on possible revisions to its property requirements.
According to the letter, FHA’s existing minimum property requirements often require appraisers to act as de facto property inspectors and can trigger mandatory repairs that are unnecessary to protect either borrowers or lenders.
The organizations said those requirements frequently delay home sales, increase costs for both borrowers and lenders and make FHA-financed purchase offers less attractive to sellers than offers backed by conventional mortgages. They described the MPRs as “one of the most significant impediments” to broader use of FHA financing.
Recommendations Shared
Rather than relying on FHA’s current checklist of required repairs, the groups recommended the agency adopt the property condition rating system already used by Fannie Mae and Freddie Mac. Under that approach, appraisers assign properties condition ratings ranging from C1 for new or nearly new homes to C6 for homes considered unsuitable for occupancy. The trade associations argued the system provides adequate consumer protections while allowing lenders and appraisers to distinguish between serious defects and minor cosmetic issues that should not derail a transaction.
The letter also recommends replacing FHA’s automatic “subject to repair” requirements with a framework that differentiates among repairs that must be completed before closing, repairs that could be addressed after closing through escrow arrangements, and cosmetic issues that do not materially affect a property’s safety, structural integrity or marketability.
The organizations contend the GSE approach has demonstrated that it can protect borrowers while reducing unnecessary barriers to obtaining FHA loans.
Borrowers Would Still be ‘Protected’
“Adopting the GSE rating system would still protect FHA borrowers from purchasing substandard housing and would have the benefit of standardizing key elements of the appraisal process, making the FHA program easier and more attractive for lenders, and less costly for consumers,” the groups wrote.
In responses to FHA’s request for public comment, the organizations said current MPRs contribute to FHA purchase offers being passed over in competitive housing markets because sellers often perceive conventional financing as more likely to close quickly. They recommended separating appraisal requirements from repair and inspection requirements and aligning all minimum property standards with those used by Fannie Mae and Freddie Mac.
Specific Burdens
Among the specific provisions the groups identified as overly burdensome were peeling paint requirements in certain situations, handrail requirements in low-risk scenarios, minor cosmetic deficiencies, roof life thresholds and certain technical site and access requirements that they said have limited connection to health or safety.
The letter also argues that FHA guidance has become fragmented after more than two decades without a comprehensive update, resulting in inconsistent interpretations by lenders and appraisers. The organizations recommended consolidating all property requirements into a single FHA handbook section while harmonizing standards with those of the GSEs.
The trade groups urged FHA to publish draft implementation guidance for public review before adopting any new standards, saying doing so would minimize differing interpretations and speed industry adoption.
“FHA is the nation’s flagship program for first-time homebuyers,” the letter states. “Aligning the FHA home loan program with conventional financing would improve efficiency and increase the program’s effectiveness and appeal.”
