The Department of Housing and Urban Development's "biggest priority in single family housing" for the 2007 legislative year is reforming the Federal Housing Administration.
And even though the Democrats now control Congress, FHA Commissioner Brian Montgomery thinks this is the year a measure aimed at restoring the agency to its intended position in the marketplace will make it to the President's desk.
"I think we're on solid ground with this legislation because of its broad bipartisan appeal, Montgomery said at the National Association of Home Builders annual convention in Orlando last week.
"With the new leadership, I think we have a great opportunity to push what could be perhaps one of the greatest pieces of bipartisan legislation of the 100th Congress," he said.
Legislation to revitalize the FHA passed the House by an overwhelming margin last year, with every Democrat who could vote voting for the measure. But the bill floundered in the Senate, largely because of partisan politics.
While the shift in House leadership should not result in new-found opposition to reform, the same cannot be said of the Senate. But with the opposition party is now in control of the upper chamber, it may actually help.
Still, Montgomery told the builders that some Senators and their staffs are not yet convinced of the bill's necessity.
As the FHA Commissioner sees it, the three mains sticking points are the same as they were in 2006 - the fear that the proposed changes would end up hurting rather than helping home buyers, concern that the agency is incapable of handling more complex programs, and worry that the FHA will take business away from the private sector.
In his talk to the NAHB's Housing Finance Committee, Montgomery addressed each of these issues, elaborating in detail the arguments he plans to use to convince lawmakers who are still on the fence about whether or not the FHA needs to be revamped:
But Montgomery stressed that the agency "has no plans" to loosen its eligibility criteria. "Our underwriting standards are designed to determine which borrowers represent an appropriate level of risk," he said. "That will not change."
By going to risk-based premiums, as most of the mortgage business already has, the FHA commissioner said his agency will be able to reach more lower income borrowers at a substantially lower price than they are now paying for subprime loans.
According to HUD, a 1 percent increase in the upfront insurance premium on a $200,000 loan would cost about $19 a month, "the price of a Domino's pizza," Montgomery noted. "Or two pizzas if you have a coupon."
For that price, HUD says, a borrower can obtain an interest rate priced for risk at about 3 percentage points less than a subprime loan, which translates in a savings of $255 a month or $125,000 over the life of a 30-year mortgage.
Montgomery also told the builders that the concern that no-downpayment loans would add another layer of risk that home buyers will be unable to handle "is simply unfounded."
The HUD official pointed out that 43 percent of last year's home buyers didn't put up a downpayment, even though many had the resources to do so. They chose not to, he ventured, because they wanted to save their cash.
He also said 100 percent financing is a "better alternative" than seller-funded downpayments, which have come under increasing scrutiny because of the high number of foreclosures. But even so, he added, the agency will adopt more stringent underwriting rules for cashless borrowers and encourage them to seek housing counseling.
But Montgomery said his department is up to the task. "There should be no doubt we can manager our own programs," he told the builders, adding that if anything, modernization will improve the agency's ability to manage risk.
The FHA is seeking to serve borrowers who don't qualify for loans at prime rates but who do meet the agency's eligibility criteria, he explained. "There will still be plenty of borrowers who can't meet either threshold and must rely on subprime loans."
The agency won't infringe on the government sponsored enterprises or private mortgage insurers, either, he said, noting that there is very little overlap between the FHA's and the GSEs' businesses and that PMIs cannot reach borrowers "at the same low price that we can." "The FHA has a very specific and very critical role to play, and modernization is not intended to expand our reach beyond what is appropriate and necessary," Montgomery told the builders.
"We are simply trying to serve those families who need the benefit of a government insurance product to achieve home ownership at a fair price."
