The London Interbank Offered Rate will soon be an eligible index for adjustable-rate and reverse mortgages insured by the Federal Housing Administration. While the move is a step toward modernizing the FHA program, mortgage brokers and bankers say further action is necessary to boost the program's effectiveness.
Effective Aug. 20, the LIBOR will be an acceptable index for determining interest rate adjustments on FHA-insured ARMs and Home Equity Conversion Mortgages, the U.S. Department of Housing and Urban Development said in a final rule notice.
Through the new rule, the 1-year LIBOR will be acceptable for rate adjustments on HUD-insured 1-, 3-, 5-, 7-, and 10-year ARMs. For reverse loans, adjustments can be based on the 1-month Constant Maturity Treasury, the 1-month LIBOR and 1-year LIBOR, HUD reported.
Under current regulations, rate adjustments can only be indexed to the weekly average yield of U.S. Treasury securities adjusted to the 1-year Constant Maturity Treasury, according to the notice. This, because HUD believed that indices calculated and published by the U.S. government were appropriate for government-insured mortgages.
"However, the growing popularity of the LIBOR index, including its acceptance in the secondary mortgage market, has led to a change in HUD's policy on this issue," the notice read.
"With the large number of lenders now offering LIBOR-based ARM loans, to be competitive it no longer makes economic sense for FHA to restrict itself to the Treasury index," it continued.
HUD proposed the change in June 2006. The five comments it received from three mortgage banker and home builder trade organizations, a banker's mortgage division and a residential mortgage group stated the addition of the LIBOR allows lenders greater flexibility in offering ARM and reverse products, provides an incentive for more lenders to use the FHA program, and broadens options for borrowers.
In prepared Congressional testimony, the Mortgage Bankers Association and the National Association of Mortgage Brokers offered further recommendations to update the FHA programs and expand consumer access to them, according to announcements Wednesday by the organizations.
"We have watched with growing concern as FHA has steadily lost market share over the past decade, potentially threatening its long-term ability to help underserved borrowers," MBA Vice Chairman David Kittle reportedly said.
Kittle, who is also president of Principle Wholesale Lending, said that only 2 percent of his business goes to FHA, compared to 38 percent in the latter part of the 1990s and over 90 percent in 1983.
"Lenders have progressed, reacting to quickly changing and efficient technology," Kittle added. "Unfortunately, FHA has not."
He urged Congress to enact legislation to reform FHA by empowering with more flexibility to introduce innovative new products, invest in new technology, and manage their human resources.
NAMB President George Hanzimanolis said he agreed with many of the proposed reforms to the FHA program but suggested adjustments be made to increase mortgage broker participation.
"FHA must be modernized so that it can become an effective vehicle to provide borrowers, especially subprime borrowers, with affordable financing choices that can be sustained over the long-term," he said.
Among Hanzimanolis' suggestions were to replace financial audit and net worth requirements with annual bonding requirements; eliminating the down payment requirement on FHA loans; and adjust current FHA loan amounts for high-cost areas. He emphasized NAMB supported allowing FHA loan limits to be adjusted up to 100 percent of the median home price, allowing FHA loan limits to respond to changes in local housing markets.
In letters to House and Senate representatives, MBA and two other trade groups jointly said the FHA's loan limit could be hurt through guidance the Office of Federal Housing Enterprise Oversight proposed for conforming loan limit calculations for Fannie Mae and Freddie Mac.
OFHEO's proposed guidance, which was posted on its Web site for public comment, establishes procedures for incorporating declines in the statutory home price index in the annual conforming loan limit calculation, MBA, the National Association of Home Builders and the National Association of Realtors said in the letters.
The trade groups urged the representatives to have OFHEO withdraw the proposed guidance, citing it was bad public policy and did not appear to be authorized under current law, which only permits increases in the loan limit. The groups also indicated the proposal should have been widely circulated for public comment through the Federal Register to allow full public comment.
"The Enterprises may not purchase loans above the conforming loan limit," the groups wrote. "The conforming loan limit also impacts limits for FHA and VA loans, as FHA and VA loan limits are tied to the CLL. In fact, a decrease in the CLL could have an adverse budget impact if the result is that borrower access to the FHA and VA loan programs is limited and the two agencies produce lower guarantee and insurance fee income."