Anti FHA Reform

The Department of Housing and Urban Development said, the Expanding American Homeownership Act , which was passed by the House on July 25, would modernize the program and increase homeownership opportunities.

The bill still needs Senate approval as well as the president’s signature.

“When FHA was formed in 1934, it was an historic event that made homeownership possible for people who had nowhere else to turn,” said Assistant Secretary for Housing-Federal Housing Commissioner Brian D. Montgomery in an announcement. “We are now closer to another landmark — a modernized, flexible FHA that can respond to the needs of today’s low and moderate-income homebuyers who need a helping hand.“

While higher-risk borrowers would pay a “slightly” higher premium, the bill would allow charging lower fees for those with a lower-risk profile, HUD said.

Additionally, proposed changes that would enable FHA to offer of downpayment options would eliminate the current 3 percent downpayment minimum requirement, which “does not meet the demands of today’s marketplace, where most first-time homebuyers put down two percent or less,” according to HUD’s announcement.

The act would also reportedly raise FHA’s loan limit in high-cost areas by 13 percent to 100 percent of the government-sponsored enterprise conforming loan limit and for lower-cost areas by 17 percent to 65 percent.

“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, down 95 percent from 109,000 in 2000,” HUD said.

The National Association of Mortgage Brokers applauded the House’s passage of the act and encouraged the Senate to quickly consider and pass the legislation because the bill would allow mortgage brokers to acquire an annual bond in place of the audit requirements, and thereby, expand access to more affordable loans for traditionally underserved populations.

“The current FHA regulations require an extensive annual audit for any mortgage broker interested in offering FHA loan products,” said NAMB President Harry Dinham in an announcement. “The compliance costs of hiring an accountant and reviewing financial records can be a significant burden for some brokerages. The result is that many brokers forgo the process and choose not to offer FHA loans that could benefit potential customers.”

The Mortgage Bankers Association also expressed support of the bill’s passage.

“FHA has the potential to expand homeownership to underserved consumers, specifically first-time, minority and low- and moderate-income borrowers, but there are certain regulatory and legislative changes that need to be implemented to ensure the viability of FHA and the long-term success of its programs,” said MBA Chairwoman Regina Lowrie in the written statement. “MBA is pleased that the House understands the urgency of this issue and passed legislation .. that will make many of the needed changes to get FHA back on track to achieve its mission of facilitating affordable housing for Americans.

“We hope that Senators will consider similar action in their chamber soon.”

But eight consumer groups have jointly signed a letter addressed to U.S. Senate leaders requesting that they consider the effects of FHA reform provisions in the bill.

The octet included the Association for Consumers Organized for Reform Now, Center for Responsible Lending, Consumer Federation of America, National Community Reinvestment Coalition and the Consumer Law Center.

The consumer groups opposed proposed provisions “that seek to enlarge third-party mortgage broker participation in FHA at the expense of diluting financial accountability requirements.” Expanded broker participation “may not be good thing” for FHA borrowers because the “largely unregulated mortgage broker industry is all too closely associated with the proliferation of predatory lending practices occurring in the subprime market,” and previous research not only indicates minority borrowers on average pay higher fees for broker-assisted mortgages than with non-broker-originated loans but has also shown that larger broker participation would not change mortgage volumes.

NAMB’s Dinham, noting that brokers originate a vast majority of new home loans nationwide, acknowledged the opposition to the bonding provisions in favor of the status quo.

“While these groups may have good intentions, they are basing their position on flawed information that is certain to harm consumers in the long run,” he added. “Expanding access to FHA loans for first-time, minority and low-to-moderate income home buyers, will help these consumers avoid having to explore alternatives in the non-prime market.”

A second main concern expressed by the consumer groups was that the proposed change to have FHA charge risk-based insurance premiums on single-family loans , rather than the traditional flat premium, would require borrowers with lower credit scores to pay more and would promote the making of higher cost loans.

“We are concerned that customers priced out of the FHA market may have no other choice but to turn to subprime loans, and fear that some may fall victim of predatory lenders that operate in the market,” the groups said in the later.

The groups cited that research has shown that the shift to score-based fees could make FHA loans to expensive for some families and would not generate any new revenue “for years to come.”

“The rise of subprime lending and other changes in mortgage market recently seem to have cut into and reduced FHA market share,” the groups wrote. “The interests of FHA are best served through the offering of more consumer-friendly alternatives rather than merely seeking to outsell subprime market competitors.”