FHA Reform Bill Picking Up Steam In D.C.

Good news for modest-income home buyers and their real estate professionals could be coming in the near future, writes syndicated columnist Kenneth Harney. Thanks to legislation making its way up Capitol Hill, the Federal Housing Administration (FHA), once the dominant source of financing for first-time buyers short on down payment cash, could be headed for a major overhaul and improvement.

Last week, a House subcommittee unanimously approved the bipartisan FHA reform bill (HR 5121), or the “Expanding American Homeownership Act of 2006.” A vote is expected before the end of June, with like legislation introduced short in the Senate, where a June 20 banking committee hearing is scheduled.

Advocates of the bill say the Senate could vote on its version as quickly as September, with the final legislation making its way to the desk of President George W. Bush by October.

What makes this FHA reform effort so extraordinary is its wide spectrum of backers, both in Congress and in the financial industry. The House bill has more than 60 co-sponsors, including many who are ideologically poles apart on most issues. The prime co-sponsors of this home loan reform bill are conservative Republican Rep. Bob Ney of Ohio, and far-left Rep. Maxine Waters, a California Democrat.

The collection of industry groups supporting the bill also is diverse. The American Bankers Association and the National Association of Realtors, for example, have engaged in some bitter battles issues such as banks getting involved in real estate brokerage, but they both are lobbying Congress to get the FHA bill passed quickly. Also among the industry supporters are:

• The National Association of Home Builders
• The National Association of Hispanic Real Estate Professionals
• The minority National Association of Real Estate Brokers
• The National Association of Mortgage Brokers

The bill would, essentially, broaden the FHA’s ability to compete with private subprime lending institutions. For starters, it would simplify FHA down payment rules, allowing for minimal or even no down payments for qualified applicants. It would also accomplish numerous other reforms, including…

• Upping the much-criticized maximum limits to each local market’s median home price. Some high-cost areas, such as the California and Florida housing market, would see their ceilings soar. In California, FHA loan are now around $300,000 and would be raised over $500,000 or even $750,000 under the new rules.
• Allowing the FHA to price applicants according to the credit risks they present. Known in the subprime and prime markets as “risk based pricing,” this is hardly a new concept, except to the FHA. Borrowers who have lower credit scores and are thus rated higher risks by the FHA could be charged lower upfront and monthly premiums. High-risk borrowers, conversely, would pay higher premiums and monthly payments.
• The introduction of more innovative loan concepts to keep pace with private market developments, such as 40-year home loans.

In addition to these reforms, the FHA would still be empowered to offer superiors package of consumer protections to home buyers. For instance, subprime lenders will often impose a stiff prepayment penalty, which results in thousands of dollars assessed to borrowers engage in the process of Florida home loan refinancing, or terminate their mortgage altogether during the first three years. The FHA bans prepayment penalties altogether.

The key purpose of the bill is to enable FHA to rebuild its market share, which has slipped from about 12 percent in the late ’90s to 3 percent this year. For those seeking Florida home loan relief in these trying times, this FHA reform could not come at a better time. Stay tuned.