The term "FHA Modernization" is about as good as it gets when it comes to PR, positioning and spin. After all, who could possibly be against modernization?

But a cute term and a lot of PR muscle hardly justify efforts to erode and degrade the booming FHA program.

When someone mentions "FHA modernization" do you really know what changes are being proposed? Here's a quickie run-down:

First, reduce the downpayment requirement from today's 3 percent to 1.5 percent or maybe 0 percent. Is this a smart idea? Unlike HUD, the huge PMI Mortgage Insurance Co.,says that as of March 1st it will no longer provide coverage for loans with less than 3 percent down?

Second, go to a system of risk-based insurance premiums -- the worse your credit the higher your monthly insurance cost. But the FHA program is supposed to be an alternative to the private mortgage system, not one which excludes borrowers. Yet according to the General Accountability Office, the new system would raise monthly costs for 37 percent of all FHA borrowers while 20 percent of all current borrowers would no longer qualify for the program.

Third, HUD wants to raise FHA loan limits. Both conventional and FHA limits have been stretched for 2008 under the just-enacted stimulus package, but investors are shying away from the high-risk loans and you know the deal: Few investors will mean higher rates and tougher qualification standards.

The country needs more than advertising slogans to deal with the real financing problems we face. How about lowering the caps on FHA mortgages or reducing the insurance fees for reverse mortgage borrowers? Now that's modernization.

Published: February 20, 2008

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