There are several proposals floating around Capitol Hill to reform the Federal Housing Administration (FHA) in an effort to increase homeownership opportunities for many Americans, such as the Federal Housing Fairness Act of 2006 (SB 2597), introduced in the U.S. Senate by Sen. Hillary Clinton (N.Y.), and the Expanding American Homeownership Act of 2006 (HR 5121), introduced in the House by Rep. Bob Ney (Ohio). Adding to the growing chorus for change at the FHA, the U.S. Department of Housing and Urban Development has announced a far-reaching proposal to modernize the FHA and make it an important financing option in today's housing market.
"FHA was created during the Depression to stimulate the housing market at a time when homeownership simply wasn't a reality for most people. FHA has been able to help over 33 million families become homeowners since that time, but now it needs to be able to adapt to today's marketplace. A new, modern-era FHA would offer many hard-working Americans a variety of homeownership options that are safer and at a fair price," said Assistant Secretary for Housing/Federal Housing Commissioner Brian D. Montgomery in testimony before the U.S. House Subcommittee on Housing and Community Opportunity. He used the opportunity to put forward the FHA Modernization Act, a legislative proposal that would enable the FHA to reach deeper into the pool of prospective borrowers. Many of these borrowers are currently willing to pay sub-prime rates to become homeowners because they believe they have no other option.
A.W. Pickel III, CMC, a past president of the National Association of Mortgage Brokers and the owner of LeaderOne Financial Corporation in Lenexa, Kan. also testified before the subcommittee, stating, "Congress and this administration have made homeownership a priority in our country. Unfortunately, today the demand for homes continues to outpace new housing development and sales of existing homes, causing escalation of home prices." Pickel said that increasing access to FHA-insured loans would help low- to moderate-income homebuyers take advantage of the safer and less expensive financing options provided through the program. "Making FHA more competitive will improve the service and products provided by other lenders and insurers in the industry and help to restore FHA loans to levels of previous years," he noted, adding that not only would these loans be more attractive to consumers, but also to mortgage brokers. Mortgage brokers originate more than two-thirds of all mortgage loans nationwide, but find current FHA loan products uneconomical because of burdensome audit and net worth requirements.
The FHA Modernization Act would do the following:
• Create a new, risk-based insurance premium structure for
FHA that would match the premium amount with the credit profile of
the borrower. It would replace the current structure, in which
there is standard premium amount for all borrowers, while still
protecting the soundness of its insurance fund. FHA would have the
flexibility to charge higher-risk borrowers a slightly higher
premium and to charge a lower premium for low-risk borrowers.
• Eliminate the current statutory three percent minimum down payment, reducing a significant barrier to homeownership. FHA's existing down payment requirement does not meet the demands of today's marketplace, where most first-time homebuyers put down two percent or less. The new FHA would offer a variety of down payment options.
• Increase and simplify FHA's loan limits. FHA's loan limit in high-cost areas would rise from 87 to 100 percent of the government sponsored-enterprise conforming loan limit and in lower-cost areas from 48 to 65 percent of the conforming loan limit. This change is crucial in today's housing market. In many areas of the country, the existing FHA limits are lower than the cost of new construction, eliminating FHA financing as an option for buyers of new homes in those markets. The FHA has simply been priced out of the market in other areas, such as California, where FHA insured only about 5,000 home mortgages in all of 2005.
The legislation would also expand the availability of the Home Equity Conversion Mortgage (HECM) program for the elderly by eliminating the cap on the number of these loans that FHA can insure. In addition, a new HECM for home purchase product would enable the elderly to move from the family home to housing more suitable for them as they age.
Other proposed reforms would make it easier for FHA to serve purchasers of affordable housing such as manufactured homes and condominiums. FHA would eliminate a feature of its manufactured housing program that limits how much a lender can recoup from mortgage defaults, providing greater incentive for lenders to make these loans. The proposal would also increase the loan limits to reflect the real cost of manufactured housing today. The legislation would also eliminate burdensome statutory provisions for insuring condominiums, which serve as one of the primary forms of affordable housing for first-time homebuyers.
For more information, visit www.hud.gov.