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Senate Passes FHA Modernization Bill

S.2338 approved by vote of 93 to 1

December 14, 2007


Legislation that would modernize the Federal Housing Administration has been passed by both the U.S. House of Representatives and the U.S. Senate and could soon be on its way to the president.

S.2338, the FHA Modernization Act of 2007, was approved by the Senate today by a vote of 93-to-1.

"The fact of the matter is that FHA, due to statutory constraints, has not been able to keep pace with changes in the housing markets," David G. Kittle, Chairman-elect of the Mortgage Bankers Association, said in a statement today. "This legislation will allow FHA to be more efficient and timely in meeting the needs of borrowers -- which is especially important during this time of market turmoil."

The bill prohibits down payment assistance funded by the seller or anyone else who benefits financially from the transaction. It Senate legislation also removes the current cap on the maximum number of home equity conversion mortgages FHA can insure and boosts the maximum size of FHA-insured loans and reverse mortgages. In addition, it limits origination fees to 1.5 percent on HECM loans.

The bill improves the ability of FHA to help subprime and other challenged mortgage borrowers, the National Association of Home Builders said in a press release. It also simplifies requirements for condominium loans.

A statement issued by U.S. Housing and Urban Development Secretary Alphonso Jackson said, "I especially appreciate the bipartisan leadership of Senators Chris Dodd and Mel Martinez in our effort to reform FHA."

The National Association of Realtors said in an announcement that the FHA program enables higher risk borrowers to obtain prime financing.

A House version of the bill approved in September, H.B. 1852, The Expanding American Homeownership Act of 2007, extends the maximum length of FHA loans to 40 years from 35, makes it easier for borrowers to refinance into an FHA loan, allows some down payment assistance providers to participate in the FHA program, and authorizes zero and lower down payment loans for borrowers that can afford mortgage payments but lack the cash for a required down payment.

The House bill would also boost the FHA loan limit in high-cost areas to 100 percent of Freddie Mac's conforming limit, currently $417,000.

The White House previously expressed concern over a provision of the House bill that would allow participation by brokers who are inadequately capitalized or have internal control difficulties, though the National Association of Mortgage Brokers noted at the time NAMB's support of the provision enabling brokers to obtain surety bonds without having to go through a costly audit.

"Given the current housing market environment, modernizing FHA is something that the government can do that will have an immediate impact helping some distressed borrowers who are having trouble paying their current mortgages avoid foreclosure," MBA's Kittle said in today's statement. "We look forward to getting a meaningful FHA modernization bill to the president as soon as possible."

NAHB echoed MBA's message, noting, "We urge the House and Senate to move quickly to iron out differences between their bills and bring this legislation to the president's desk before year-end."

The American Bankers Association also weighed in on the legislation.

"This bill makes the changes necessary to improve the efficiency of the FHA, increase competition among lenders and provide borrowers with a much needed option in the current tight credit market," ABA Executive Director Floyd E. Stoner said in a statement. "This legislation will return the FHA to its intended role as an innovator in the mortgage market."

A White House statement today commended the Senate's passage of the bill and suggested a reconciled bill between the House and Senate will enable the housing agency to help hundreds of thousands of borrowers before the end of Fiscal 2008 in addition to the tens of thousands who have already been helped. But the administration noted some concern remains with both bills.

"FHA should be able to design mortgage products that can help at-risk borrowers, reward borrowers with good credit histories, and protect taxpayers with actuarially sound financing," the White House stated. "We hope to work with Congress to resolve those concerns in a conference between the House and Senate."

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: [email protected]

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