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Subprime FHA Product Back on Track

HUD estimates 62,000 subprime borrowers would get loan in first year

September 17, 2003


The Bush administration's plan to create a multibillion subprime mortgage product that had been derailed in a U.S. House committee is back on track thanks to the favorable nod of a Senate panel.

The Senate Appropriations Committee has revived budget language that would pump $36.1 billion into the Department of Housing and Urban Development (HUD) for a Federal Housing Administration (FHA) program geared to borrowers with poor or damaged credit. Earlier, the House Appropriations Committee had gutted the money from the budget after concerns were raised that the program could carry a default rate as high as 15%.

Now that the Senate committee has reinserted the money into a spending bill for three federal agencies -- including HUD -- the legislation will move on to the full Senate and then back to the House for final approval. A vote has not been set, but Congress traditionally wraps up major spending bills in October.

The program was a part of the 2004 budget request President George Bush submitted to Congress, according to testimony National Association of Realtors (NAR) president Cathy Wathley gave to the Senate Banking, Housing and Urban Affairs Committee in June.

Borrowers would be required to meet debt, income and repayment ability standards but are not required to meet traditional underwriting standards because of their credit rating, she said.

The loans would carry higher insurance premiums of up to 1%, but after two years of on-time payments the premium would be reduced.

"We support development of such a product, which would expand home purchase opportunities for more borrowers," Wathley told lawmakers according to a transcript of her testimony posted on the NAR website. "Homebuyers with impaired credit are customarily at risk for predatory lending. We believe an FHA loan of this type would protect these borrowers, and offer them more opportunities for home purchase without subjecting them to a lifetime of higher premiums."

HUD estimates that 62,000 "credit-impaired homebuyers" would receive a mortgage loan in the program's first year, Wathley said. The program is also expected to generate $7.5 billion a year in additional insurance volumes for the FHA, she added.

According to information provided by the NAR, one out of every seven American families, a total of 13 million, has "critical housing" needs, and more than 7.5 million renters are also in a "critical" situation due to living in substandard housing or paying more than 50 percent of their income on housing.

"We welcome the opportunity to work with the administration and Congress to develop an FHA subprime loan product," Wathley said.

In a statement the Washington-based National Home Equity Mortgage Association said it is still evaluating the program and has not yet taken a position. Many of the group's members -- subprime and home equity lenders -- stand to lose at least a portion of their business to an FHA subprime product.

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: [email protected]

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