Paper Economy: FHA In The 21st Century

In 2006, Congress attempted to revamp the Federal Housing Administration (FHA) in an effort to modernize its service.

At the time, it was argued that certain limits defined for FHA operations by the National Housing Act were outdated and thereby causing the prevalence of FHA insured loans to decline dramatically nationally, with an especially striking fall-off in high cost areas.

In the House of Representatives, a bill sponsored by Representative Patrick Tiberi [R-OH] entitled “FHA Manufactured Housing Loan Modernization Act of 2006” (H.R. 4804) was passed by an overwhelming margin with 412 Ayes to 4 Nays (16 Present/Not Voting) on July 25 2006.

In the Senate, an identical bill sponsored by James Talent [R-MO], Sen. George Allen [R-VA], Sen. Lincoln Chafee [R-RI] titled “Expanding American Homeownership Act of 2006” (S. 3535) was introduced on June 19 2006 but was not proceeded with in all likeliness due to changing priorities preceding the election that would inevitably see all of its primary sponsors defeated.

It’s important to note that ALL of the above mentioned Congressmen, House and Senate, were supported in their respective 2006 races by the National Association of Realtors Political Action Committee (RPAC), the nations largest PAC.

So, it appeared that at the end of 2006 the Senate bill was dead in the water and likely to stay that way as the Democrat-laden 110th congress focused on other objectives.

Then, toward the end of March 2007, coming on the heels of the subprime meltdown, Senator Hillary Clinton picked up the baton and began to run.

Revitalized and reintroduced as the “21st Century Housing Act” (S. 947), FHA “modernization” is back on the table and this time seems likely to be swiftly passed.

In a press release Senator Clinton stated the following:

"With the meltdown in the subprime housing market, it is clear that there needs to be a real alternative for more working families who want to achieve the dream of home ownership without having to jeopardize their financial futures with a risky mortgage product, … Modernizing the FHA will be an effective way of providing that alternative and I will press in the Senate to take this long overdue step for our families,"

Additionally, Clinton included the following statement from National Association of Realtors President Pat Vredevoogd Combs: “This legislation will strengthen FHA and make it a viable alternative to some of the riskier products that have been marketed to homebuyers,"

It’s important to keep in mind that FHA insures loans through a traditional insurance fund approach collecting both an upfront and annual premiums from the homebuyers.

By lowering current qualifying standards, Congress would allow more loans to meet the criteria needed to be federally insured.

The homebuyer has to pay an additional premium, but because the loan is insured, it will come with a better rate and be more available especially for buyers who would have otherwise been unable to get a loan.

It’s also important to note that throughout the funds history it has vacillated between being self-sustaining and costless to running deficits and costing taxpayers.

The changes now proposed include allowing for 50 amortizing loans, allowing zero down payment, allowing loans that are 100% either the areas median home price or 100% the current conforming limit, and changing the premium fees.

Additionally, although the maximum premium fees have increased, there is inserted text that appears to suggest that the Secretary (of HUD) is able to create new initiatives at any time and even possibly waive premiums for some borrowers.

Given the unprecedented boom seen in the nations housing markets and now the equally impressive bust, it seems imprudent to be endorsing any program that may serve to assist “homebuyers” in stretching to afford dramatically overvalued homes.

It seems now more than ever there should be a moratorium on Congressional tinkering allowing home prices to come back into line with the fundamentals (income, rents, etc.) that traditionally underpin them.

The only reason FHA currently appears to be defunct is that home values swelled well far beyond the range of FHA’s mandate but as we all now know, the bubble swelling is over.

It was only a little over 5 years ago that the FHA program was being heralded for it’s financial soundness and surpluses so much so that administrators slashed premiums and fee schedules.

The primary changes to the existing National Housing Act are as follows:

Increases the maximum limit for mortgage maturity term from 35 years to 50 years of amortization.
Decreases the minimum down payment on a home from 3% to 0%.
For single family homes, increases the eligibility limit to 100% (from 95%) median home price or 100% (from 87%) of the current conforming loan limit
Allows for more flexibility in determining the up-front insurance premium based on a percentage of the loan principle and the discretion of the program as well as increasing the maximum premium to 3% from of loan principle from the prior 2.25%.
Increases the annual premium maximum from .5% to 1% of the remaining insured principle balance.
Increases the eligibility limit for multi-family home purchases.
Increases the capital ratio of the insurance fund from 2% to 3%.

As usual, let Senator Clinton know what your take is on this topic by emailing her office or if you agree with the sentiment, simply email a link to this post.

Monday, April 16, 2007

FHA In The 21st Century