FHA Loosens Rules, Lowers Barriers
The federal government's biggest home mortgage program streamlined itself at the end of December, and that could be good news for buyers, sellers, real estate agents and builders.
The Federal Housing Administration's decision to eliminate or soften many of its onerous rules about property conditions and mandatory repairs should be a stimulant to the entire housing market this year. It could help open low-down-payment mortgages with no prepayment penalties to thousands of first-time, moderate-income purchasers who might otherwise have turned to higher-fee, subprime alternatives.
Those new buyers, in turn, could provide sellers of lower-cost dwellings the cash to move up to more costly properties -- prompting more sales activity up the housing-price ladder.
The FHA once dominated the lower-cost segment of the national housing market and was a crucial entry point for young, minority and lower-income purchasers. But in recent years, it has been heavily criticized for enforcing decades-old, overly paternalistic requirements about property condition and repairs of resale houses. In the boom markets of 2004 and 2005, real estate agents often advised sellers to reject purchase offers that came with FHA mortgage financing contingencies.
Whereas buyers using other forms of financing could buy houses "as is," FHA rules required painting, patching, repairs and inspections before the mortgage could be closed -- even if the defects were minor and did not affect health or safety. FHA-contingent offers were viewed as too troublesome, and agents, lenders and sellers in some urban areas effectively boycotted the program. Meanwhile, the FHA's share of the overall market plummeted to a record-low 3 percent, down from 11 percent less than a decade earlier.
Thanks to a clean sweep of its rules last year, capped by revised repair and inspection standards outlined to lenders at the end of December, agents and home sellers might begin to take a fresh look at the FHA as an alternative. Buying a house with FHA financing no longer will put bidders at a competitive disadvantage.
In a Dec. 19 letter to lenders, FHA Commissioner Brian D. Montgomery announced that his agency "has shifted from its historical emphasis on the repair of minor property deficiencies and now only requires repairs for those property conditions that rise above the level of cosmetic defects, minor defects or normal wear and tear."
Before the policy change, the FHA required advance repairs on resale homes for defects such as: cracked windowpane glass, leaky faucets, soiled or poorly installed carpeting, missing handrails on stairways, cracked or buckled sheetrock or plaster in walls or ceilings, crawl spaces that contained any type of debris, cracked sidewalks, or flooring finishes that were worn or deteriorated.
Though the agency considered its strict standards to be a valuable consumer protection measure, almost everybody else in the market considered them to be needlessly nit-picky. Under the agency's more tolerant standards, minor defects no longer will have to be repaired in advance of the mortgage closing.
More serious defects on resale houses, such as structural problems, foundation damage, bad roofing and electrical hazards that pose more serious risks to buyers still will be subject to mandatory repair.
The FHA also announced that previously mandatory inspections for a number of property conditions also have been waived. These include:
· Termite and other insect damage problems, unless there is "evidence of active infestation" or local regulations require inspections.
· Septic systems where there is no evidence of malfunction.
· Wells that are functioning normally and show no signs of contamination.
FHA's streamlining of property rules is part of a broader effort within the agency to regain its previous role in the national real estate marketplace. Last year, Montgomery and federal Housing and Urban Development Secretary Alphonso Jackson said they now agreed with critics who said FHA rules and procedures were out of date. More important, Jackson said, FHA had a mission to ease the way for lower-income and minority renters into homeownership through low down payments and generous credit and debt-ratio standards.
"We need to reach out" to black, Hispanic and other consumers with better loan concepts, less red tape and faster mortgage approvals, he said. Jackson argued that in comparison with most subprime loans, FHA "offers a better deal. We've got a superior product" -- lower interest rates, lower fees, no prepayment penalties and mortgage limits up to $362,790 in high-cost urban areas and $200,160 in others.
The latest rule changes may not get rid of all the critics -- after all, the FHA is a government-run insurance program -- but it should get the attention of buyers and sellers in the moderate-cost segments of the market, along with the real estate and lending professionals who work with them.
Kenneth R. Harney's e-mail address isKenHarney@earthlink.net.