FHA Proposals Get Attention

Montgomery said FHA wants to give borrowers a choice of how much of a down payment to make for house purchases ranging from zero to 10 percent and to be charged premiums based on the size of the down payment the consumer chooses to make.

The venerable lending agency wants the flexibility to set its insurance premiums on a sliding scale, taking into account the borrower’s credit profile. Montgomery said such a scheme would allow FHA to serve creditworthy individuals who can not presently qualify for prime financing.

Montgomery said the agency needs the authority to increase loan limits so that borrowers in high-cost areas such as California will have access to FHA home financing. Presently the average cost of a house in the Golden state has served as a factor in shutting California homebuyers out of the FHA finance market.

Montgomery made his remarks before the U.S. House of Representatives’ Subcommittee on Housing and Community Opportunity. The hearing was entitled “The Expanding American Homeownership Act of 2007: H.R. 1852 and Related FHA Modernization Issues.”

John M. Robbins, Chairman of the Mortgage Bankers Association, said FHA has already made significant changes to its regulations and operations by streamlining the insurance endorsement process, improving appraisal requirements and removing other regulations. But, he said, there is much that is beyond FHA’s control to change, thus mandating Congressional action.

MBA has concluded that FHA needs greater autonomy, he said. The increased independence is necessary so that FHA can more quickly introduce new mortgage finance products such as hybrid ARMs and 40-year mortgages. FHA needs to be allowed to invest in upgrades and maintenance of its technology to better manage its portfolios and interface with lenders. And the agency also needs greater flexibility so that it can recruit, manage and compensate its employees.

Robbins said MBA is pleased with H.R. 1852 and H.R. 1752, the two House bills proposing an FHA overhaul. H.R. 1852 was introduced by Rep. Maxine Waters (D-CA.) and Rep. Barney Franks (D-MA). H.R. 1752 was introduced by Rep. Judy Biggert (R-IL).

Both proposals provide for flexible down payments, flexible risk-based premiums, an increase in mortgage limits for single-family and multifamily loans, an extension of mortgage terms, reform of FHA’s condominium program and changes to the Home Equity Conversion Mortgage program such as the permanent removal of the current $250,000 loan cap and the creation of a single, national loan limit for the HECM program, he said.

But the trade association also has some quibbles with H.R. 1852.

Where that bill would define FICO scores of less than 560 as “high risk,” MBA supports recognizing that different borrowers carry different risks and that those risks should be priced appropriately, he said.

MBA also wants FHA to increase its multifamily loan limits.

But, Robbins cautioned, access to FHA funding could be hampered if Congress does not also take action against a recent Internal Revenue Service ruling rescinding the nonprofit status of many organizations who receive funding from property sellers in providing down payment assistance to FHA borrowers. FHA regulations require that nonprofits receiving a down payment gift have an IRS nonprofit nonexempt status. The IRS is reportedly investigation about 185 of the down payment assistance organizations.

Before the ruling, more than one-third of FHA purchase loans had some type of down payment assistance. The ruling could have a dramatic impact upon FHA’s purchase production, Robbins warned.

Ed Smith, Jr., Vice President, Government & Industry Relations, California Association of Mortgage Brokers, urged the committee to support H.R. 1852.

CAMB supports the reforms to the FHA program outlined in H.R. 1852, he said, but believes that FHA must first become a viable option for borrowers by eliminating barriers for brokers.

In many instances, mortgage brokers are blocked from using FHA because current FHA financial audit and net worth requirements create a formidable barrier to mortgage broker participation, he said. CAMB believes the audit and net worth requirements should be eliminated because they are expensive.

The Golden State’s trade group believes annual bonding requirements offer a better way to ensure the safety of the FHA program than the current practice of requiring originators to submit audited financial statements and to meet net worth requirements.

Realtors and homebuilders also weighed in.

Ilona Harrison, the secretary for the Maryland Association of Realtors, told the politicians that NAR strongly supports many of H.R. 1852’s proposed changes including increased loan limits, the elimination of the three percent minimum cash involvement and down payment formulation and moving the condo program into the 203(b) fund.

Bill Killmer, the National Association of Home Builder’s vice president for advocacy, said statutory and regulatory constraints have limited the FHA’s ability to respond to the needs of borrowers, causing many home buyers to end up with in appropriate mortgages. He said NAHB does not favor either of the two bills presently before the House but instead seeks “comprehensive FHA reform.”

Finally, Lauturo Diaz, Vice President, Community Development for the National Council of La Raza, reportedly the largest national Hispanic civil rights and advocacy organization, supported change for the FHA and said the Waters/Franks bill includes several improvements such as pre-purchase homeownership counseling over the FHA bill passed by the House last year.

Speaking to reporters after his testimony, Montgomery said the White House will be introducing its bill in the next few weeks. Late last month, Sen. Hillary Rodham Clinton re-introduced her FHA modernization bill in the U.S. Senate.