FHA Mortgage Reform

Monday, September 17th, 2007 at 11:34 pm By Carl Pruitt

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We’ve been talking a lot lately about FHASecure. FHASecure was a first step toward making FHA mortgages a solution for more borrowers, but it was the part of the solution that could be implemented with no change in the law. Now there is a bill working its way through Congress that takes a big step forward from FHASecure.

Over the years the percentage of mortgages closed under FHA’s insurance program has slowly dwindled down because the FHA loan limits are below normal loan amounts in many areas. In addition, FHA’s 3 percent downpayment requirement and strange fee structure have not made FHA mortgages a competitive program in the marketplace. Had FHA loans been a more competitive product, many of the borrowers who have risky subprime mortgages would have used FHA instead.

A bill (H.R. 1852), has been introduced that would increase the FHA loan limits nationwide and in high cost areas, eliminate the 3% downpayment requirement on FHA loans for first time homebuyers, extend the loan term to 40 years, allow FHA to risk-based price their products, eliminate the cap on the number of reverse mortgages that FHA can insure, and streamline usage of the FHA condominium loan program. It would also allow excess FHA funds to be put into an affordable housing fund, rather than go to the US Treasury. Reciting the list all at once leaves you out of breath. Good grief! That’s more real change to the FHA loan program in one bill than has happened since the 1930’s all combined.

Of course the benefit of raising the maximum mortgage amounts is obvious. The elimination of the down payment requirement and extension of the mortgage term to 40 years will make the program competitive with Fannie Mae’s MyCommunity Mortgages and Freddie Mac’s HomePossible program. Except it may be the equivalent of those programs on steroids because FHA doesn’t have the same income limits that hold those programs back. Many of the problems crushing the real estate market now are caused by borrowers who could once get no down payment loans with affordable payments being forced out of the market recently. Estimates have been that as much as 15% of potential homebuyers have been shut out from buying homes by recent guideline changes. Passage of this bill could put them right back into the game.

FHA is not really the government lending money. It is the government providing an insurance program to encourage lenders to loan money to borrowers they might otherwise not consider. Up to this point, FHA loans have required the same level of mortgage insurance whether someone had perfect credit or they were just a couple of years into rebuilding from a Chapter 7 bankruptcy. A textbook example of how the market can get distorted by bureaucracy sometimes. This bill will allow FHA loans to base the mortgage insurance requirements on the actual risk level of the loan. People with better credit will get lower mortgage insurance prices. People with credit problems will still get loans. They will just have to finance in a little more mortgage insurance. This will help guarantee that the program stays well funded into the future.

The fastest growing segment of American society is the group approaching retirement age. Reverse mortgages have been an excellent way for many of those people to safely take advantage of all the equity they have built up in their homes without creating an undue financial burden during retirement. At present, there are caps on how many reverse mortgages can be insured. This has kept some potential borrowers from benefiting from the program. H.R. 1852 seeks to solve this problem by eliminatingthe cap on reverse mortgages. Likewise, many retired Americans who wish to purchase condominiums so that they can spend more time relaxing and less time painting, cutting grass and cleaning out gutters could use the FHA condominium loan program. However, at present it is a bureaucratic nightmare to deal with. H.R. 1852 seeks to remedy this.

There is a lot of promise in this bill. Of course, we never know how a bill will end up by the time our elected officials get through grandstanding and paying off special interest groups with changes to the proposal. Also, at present there is no corresponding bill being promoted in the Senate.

I encourage everyone to contact their Congressmen and Senators to help push these changes through.