FHA Fix for Subprime

The testimonies urging FHA reform passage were given today at the “Solvency and Reform Proposals for the Federal Housing Authority” hearing before the U.S. Senate Appropriations Committee’s Subcommittee on Transportation, Housing and Urban Development and Related Agencies.

“Many first time and minority homebuyers face significant challenges when trying to purchase a home,” said Brian Montgomery, the Secretary for Housing – Federal Housing Commissioner, in announcement of his testimony. “In recent years, such difficulties have resulted in many of these individuals assuming risky, adjustable-rate, subprime loans.”

Data shows that 40 percent of African Americans and 23 percent of Hispanics pay an interest rate 3 percent higher than the market rate, and that 51 percent of refinances in African American neighborhoods are subprime loans, the secretary said. Furthermore, research shows that 43 percent of last year’s first-time borrowers did not make a downpayment, and of those who did, the majority put down 2 percent or less.

The FHA currently requires a “stringent” 3 percent minimum down payment, has loan limits that do not meet the cost of most homes in high-cost areas, and has a standard insurance premium amount for all borrowers, Montgomery noted.

John M. Robbins, chairman of the Mortgage Bankers Association, emphasized that MBA has “watched with concern as FHA has steadily lost market share over the past decade, potentially threatening its long-term ability to help underserved borrowers.“

“For low and moderate income families, FHA should be the financing considered first because it has the lowest rate and provides the borrower the best opportunity to become a successful homeowner,” Robbins added.

To revitalize the FHA program, MBA called for passage of reforms that give FHA flexibility to offer innovative new products, invest in new technology, and manage their human resources. Robbins also called for changes to loan limits, “including the elimination of the complicated downpayment formula and providing downpayment flexibility,” as down payments are one of the primary obstacles for underserved borrowers.

Modernization legislation would allow borrowers to put as little as no money down, FHA’s Montgomery said, adding that higher loan limits would allow FHA to once again be a major player in high-cost areas such as California or much of the Northeast, where few have been able to use FHA funds because the limits are not high enough to meet the cost of most homes in those regions. Reform legislation would also create an insurance premium based on the borrower’s credit-risk profile.

Harry Dinham, president of the National Association of Mortgage Brokers, recommended that FHA limits be equivalent to 100 percent of the median home price for an individual county and be able to respond to changes in home prices in order for the program to reflect “a true home market economy.”

But, “regardless of how beneficial a loan product may be, it cannot be effective unless homebuyers have a realistic opportunity to find a distribution channel that offers the loan,” Dinham said. “Existing restrictions and burdensome requirements are making this a real problem.”

Dinham said broker participation in the FHA program would increases as much as 80 percent if an annual surety bond requirement for brokers would replace the FHA’s current annual audit and net worth requirements, which are “often time consuming and cost-prohibitive.”

“Together with state-licensing requirements for eligible mortgage brokers, annual bonding would maintain the FHA’s framework of responsibility and accountability, while removing barriers to broker participation,” Dinham said.

Without substantial FHA reform, “the ripple effects could easily extend to the homebuilding industry and even to the economy at large,” Dinham said. “Congress has the opportunity to revitalize the FHA program by increasing its profitability and ensuring that borrowers across the country have an equal opportunity to obtain a better loan at a lower interest rate.“