FHA Reform Bill Stumbles Forward
The FHA reform bill that passed the House of Representatives in September has been approved by the Senate. However, the Senate’s version of this legislation differs significantly from House Resolution 1852.
Key components of the FHA reform bill allow homeowners in subprime loans to refinance through the FHA. Lower down payments and risk based mortgage insurance are also part of the plan. The legislation will also make it easier to become an FHA lender.
Perhaps the most important part of the bill is an increase of loan limits to match the conforming limit at $417,000 for higher priced parts of the country. This is where the challenge lays. The next step is for the Senate and the House to present a version for President Bush to sign into law, but the loan limit differ significantly.
The House version calls for limits to go as high as $729,750 in high cost areas and the President has already indicated he would veto such a law.
Of all the “foreclosure help” out there, I believe this law makes the most sense. During the housing boom, FHA lending was virtually replaced by subprime. FHA loans are highly insured and don’t have exposure to non-owner occupied houses. Of any entity in the country to help with the foreclosure crisis, FHA is the one. Indeed, the FHA Secure program is already helping.
As the subprime meltdown continues to play out, FHA is going to have a key role in helping first time buyers and borrowers with troubled credit purchase homes. The fallout of subprime has affected prime borrowers as well. Plummeting home values are going to have a negative affect on everyone. Denver has been named a declining market by Fannie Mae, meaning everyone buying a house in the area will have to pony up an extra five percent down to make a conforming purchase. The declining market designation will also cap HELOCs and accelerate repayment schedules on Option ARMs. Other markets will soon follow.
All signs point to big trouble in the housing and mortgage markets and the FHA is the only institution equipped to mitigate the down side. We’ll have to see if the FHA reform bill is amended well enough between the two legislative chambers to earn the President’s signature and to be effective in stemming the crisis.