Relaxed FHA Regulations Could Reestablish Agency, Boost Overall Real Estate Market

The U.S. government’s biggest home mortgage program streamlined itself at the end of December, which figures to be good news for buyers, sellers, realtors and builders like, writes syndicated columnist Kenneth Harney in the Seattle Times.

The Federal Housing Administration (FHA), a branch of the U.S. Department of Housing & Urban Development (HUD) has eliminated or softened many onerous rules about property conditions and mandatory repairs. This could help open mortgages with low down payments and no prepayment penalties to thousands of first-time, moderate-income buyers — people who, in the past several years, have been turning to risky, subprime alternatives instead.

Those buyers, in turn, could provide sellers of the dwellings cash to move up to more costly properties, prompting increased sales activity at successive levels up the housing ladder.

The FHA once dominated lower-cost housing and was a crucial entry point for young, minority and lower-income buyers. But the agency has been heavily criticized for enforcing decades-old requirements about property condition and repairs of resale homes. In the boom markets of the last two years, real estate agents often advised sellers to reject offers that came with FHA mortgage financing contingencies.

In other words, buyers using other forms of financing could buy houses “as is,” but FHA rules required painting, patching, repairs and inspections before closing — even if the problems were minor and did not affect health or safety. FHA-contingent offers were considered troublesome, and agents, lenders and sellers in some areas effectively boycotted the program.

Meanwhile, FHA’s share of the overall market fell to a record low 3 percent, down from 11 percent less than 10 years ago.

Thanks to a reform of its rules last year, capped by revised repair and inspection standards outlined to lenders at the end of last month, agents and sellers might take a fresh look at FHA, as buying a house with FHA’s help do longer puts bidders at a competitive disadvantage. The agency “shifted from its historical emphasis on the repair of minor deficiencies and now only requires repairs for property conditions that rise above the level of cosmetic defects, minor defects, or normal wear and tear,” said FHA Commissioner Brian Montgomery.

Before the overhaul, FHA required advance repairs on homes for defects such as:

• Leaky faucets.
• Cracked window glass.
• Poorly installed carpeting.
• Missing handrails on stairways.
• Cracked or buckled plasterboard in walls or ceilings.
• Crawl spaces that contained any type of “debris” or “trash.”
• Worn or deteriorated flooring.
• Cracked sidewalks.

Although the agency considered its standards to be valuable consumer-protection measures, everybody else in the market considered them nit-picky. Under the more tolerant standards, minor defects no longer have to be repaired before closing. More serious problems — such as structural problems, foundation damage, bad roofing and electrical hazards that pose more serious risks to buyers — still will have to be repaired.

FHA also announced that previously mandatory inspections for certain property conditions have been waived. These include:

• Septic systems with no evidence of malfunction.
• Wells that function normally and show no sign of contamination.
• Termite and other insect damage, unless “evidence of active infestation” is present or local real estate regulations require inspections.

FHA’s streamlining of property rules is part of a broader effort to regain the agency’s previous role in the national real-estate marketplace. Last year Housing Secretary Alphonso Jackson said he agreed with critics who said FHA rules and procedures were out of date, but emphasized the agency’s mission to assist lower-income and minority renters through low down payments and generous credit and debt-to-income ratio standards.

“We need to reach out to blacks, Hispanics and other consumers with better loan concepts, less red tape and faster mortgage approvals,” Jackson said. “Compared to most subprime loans, we offer a better deal. We’ve got a superior product.”

Jackson noted that FHA offers lower interest rates, lower fees, no prepayment penalties and mortgage limits up to $362,790 in high-cost urban areas and $200,160 in others.

The rule changes may not silence all critics (the FHA is, after all, a government program) but it should get the attention of buyers and sellers in moderate-cost segments of the market, along with the industry professionals who work with them. If you are on the borderline of being able to afford a home, working with FHA programs may be a strong alternative to exotic, higher-fee Florida home loans. The agency still offers great financing, and while its regulations have been relaxed somewhat, you won’t have to worry that you are compromising your safety.