What the Bill to Revitalize the FHA Means

Lower- and middle-income home buyers got a big boost from Congress at the end of July when the House voted 415-7 to approve a bill revitalizing the Federal Housing Administration (FHA), syndicated columnist Kenneth Harney writes.

The bill designed to bolster the biggest mortgage program in the U.S. now awaits Senate action. In essence, it would allow the FHA to offer no down payment home loans for the first time, substantially increase permissible loan amounts in high-cost markets, and provide lower interest rates and consumer protections rarely available from subprime lenders.

The legislation would also effectively open the FHA marketplace to mortgage brokers, who are by far the largest source of home mortgages originated in the U.S. With brokers able to offer both private-market subprime and FHA-insured mortgages, buyers with less than stellar credit will be able to directly compare FHA’s rates, fees and consumer protection.

For example, rather than paying 9 percent for a low or no down payment loan with a hefty prepayment penalty from a subprime lender, a buyer might obtain a low or no down-payment FHA mortgage for 6.5 percent or 7 percent with no prepayment penalties at all. When shopping around for the best deal on a Florida home loan, that 2 percent could be enormous.

FHA loans also come with guaranteed loss protection requiring lenders to pursue remedial steps whenever borrowers fall behind on mortgage payments, rather than rushing to start the foreclosure process. Private subprime lenders, by contrast, often have no mandatory remedial responsibilities, and are practically hoping you default. Miss a few payments and you’re done.

The House-passed bill, called the Expanding American Homeownership Act of 2006 (H.R. 5121), would reopen the FHA program to consumers in large portions of the country where home prices far outstrip statutory limits on maximum FHA mortgage amounts.

In high-cost areas, the FHA maximums would increase to the median home price level, but not beyond the loan limits of congressionally-backed Fannie Mae and Freddie Mac, currently set at $417,000. The Fannie Mae-Freddie Mac limits move up annually as home prices increase.

Rep. Maxine Waters, a California Democrat and one of many liberals who joined with Republicans in support of the bill, estimates that more than 120,000 California residents lost the opportunity to apply for consumer-friendly FHA mortgages during the last six years because home prices in California have risen dramatically and now exceeded FHA limits.

Similar squeezes occurred in high-cost New England, New York, New Jersey and Washington, D.C., as well as big sections of the Florida housing market. Nationwide, the FHA’s share of the total market declined from approximately 11 percent in the mid-1990s to just above 3 percent last year, primarily because of statutory limitations on the agency.

Another key change on the horizon is that the FHA will join the rest of the mortgage market in underwriting home buyers based on their risks of default as measured by credit scores, down payment amounts and financial profiles.

The bill would authorize the agency to charge lower insurance premiums to applicants with lower risks of default, a standard operating procedure in the private marketplace. By the same token, borrowers could be charged higher premiums than they are today if the FHA concludes that they pose a certain credit risk.

While the bill enjoyed strong bipartisan support in the House and carries the endorsement of the White House, it faces a tougher battle in the Senate, where the housing subcommittee chairman, Republican Wayne Allard of Colorado, is skeptical about the FHA’s capacity to handle risk assessment on credit-challenged buyers.

Banking committee chairman Richard C. Shelby, an Alabama Republican, agrees on a go-slow approach. Both are considered allies of the private mortgage insurance industry on the issue, which could lead to hesitation regarding the new bill and a desire to block any revival of the FHA.

The legislation has its backers in the Senate, however, including its prime sponsor, Jim Talent, a Missouri Republican. Other supporters include John Cornyn and Kay Bailey Hutchison, both Texas Republicans, along with Johnny Isakson and Saxby Chambliss, both Republicans from Georgia, and former federal housing secretary Mel Martinez, a Republican from Florida. Home loan seekers across the country could be aided greatly by the bill, they feel.