Modest-income home buyers and their realty professionals could be in for some important good news about mortgage money: The Federal Housing Administration (FHA), once the dominant source of financing for first-time buyers short on downpayment cash, could be headed for major product improvements, thanks to legislation now moving on Capitol Hill.
A House subcommittee last week unanimously approved a bipartisan FHA reform bill, the "Expanding American Homeownership Act of 2006" (HR 5121), and a floor vote is expected before the end of June. Companion legislation in the Senate is expected to be introduced shortly, where a June 20 banking committee hearing is scheduled.
Proponents say the Senate could vote on its bill as early as September, and final legislation could go to President Bush by early October.
What is extraordinary about the FHA reform effort is its wide spectrum of backers, both in Congress and in the financial services industry. The House bill has more than 60 cosponsors, including many representatives who are ideologically poles apart on most issues. For example, the prime cosponsors are conservative Republican Rep. Bob Ney of Ohio, and far-left Rep. Maxine Waters, Democrat of California.
A coalition of industry groups supporting the bill also is diverse. The American Bankers Association and the National Association of Realtors, for example, have been bitter adversaries over the issue of banks getting involved in real estate brokerage. But they both are lobbying Congress to get the FHA bill passed quickly, before Congress heads home for the elections.
Also among the industry group supporters are the National Association of Home Builders, the National Association of Hispanic Real Estate Professionals, the minority National Association of Real Estate Brokers, and the National Association of Mortgage Brokers.
The bill would essentially broaden FHA's ability to compete with subprime lenders. It would:
- Raise the agency's long-criticized maximum mortgage limits to each local market's median home price. Some high-cost markets in California would see their FHA loan limits soar from the low $300,000 level to more than $500,000. In San Francisco, the median home price is close to $750,000. In Washington D.C. the limit would approach $425,000.
- Simplify FHA downpayment rules, and allow for minimal or zero downpayments for qualified applicants.
- Allow FHA to price applicants according to the credit risks they present -- an automated concept already widely used in the subprime and prime markets and known as "risk based pricing." Borrowers who are rated higher credit risks by FHA's underwriting system could be charged lower upfront and monthly premiums. Higher risk borrowers, on the other hand, would pay higher premiums and higher monthly payments.
- Allow FHA to offer more innovative loan concepts to keep pace with private market developments, such as a 40-year mortgage.
Along with these changes, FHA would still be empowered to offer its superior package of consumer protections to home buyers. Just one example: Whereas subprime lenders often impose stiff prepayment penalties costing thousands of dollars on borrowers who refinance or terminate their loans during the first three years, FHA bans the use of prepayment penalties altogether.
The key purpose of the bill, according to sponsor Rep. Ney, is to enable FHA to rebuild its market share, which has recently slipped from about 12 percent in the late 1990s to around 3 percent this year. Even that miniscule share has been threatened recently by an IRS ruling stripping some "downpayment gift" organizations of their tax-exempt nonprofit status.
Those organizations currently provide funding assistance on approximately 30 percent of all new FHA loan applications. With flexible downpayment authority provided by the new bill, however, according to FHA Commissioner Brian D. Montgomery, not as many applicants will need to use controversial downpayment gift programs.
