Correction to This Article
The Nation's Housing column in the June 3 Real Estate section incorrectly described a provision of legislation that would expand Federal Housing Administration mortgages. Under the legislation, the maximum mortgage amount would be the median home price for any metropolitan area and would not exceed the Fannie Mae-Freddie Mac limit, which is adjusted annually. The current limit is $417,000.

A Bill to Deliver The American Dream

By Kenneth R. Harney
Saturday, June 3, 2006

An unusual Capitol Hill alliance of liberal Democrats, conservative Republicans, commercial banks, real estate brokers, ethnic-group lobbies, home builders and mortgage brokers is supporting legislation that could give thousands of first-time home purchasers a better deal than they get in the mortgage market today.

What's the better deal? Consumer-friendly Federal Housing Administration loans that carry flexible or no down payments, no prepayment penalties, and affordable rates and fees -- unlike many subprime mortgages aimed at minority first-time buyers.

The coalition supports a bill co-sponsored by members of Congress who are opposites ideologically and rarely agree on anything. The Expanding American Homeownership Act of 2006 (HR 5121) is co-sponsored by Rep. Robert W. Ney, a conservative Ohio Republican, and Rep. Maxine Waters of California, one of the most outspokenly liberal Democrats in the House. It also unites Rep. Cynthia McKinney (D-Ga.) and Rep. Katherine Harris (R-Fla.) and more than 50 other Democrats and Republicans.

Among other odd couples backing the bill are the National Association of Realtors and the American Bankers Association, who barely have been on speaking terms for years over the issue of banks owning and running real estate brokerages.

Approved unanimously by a subcommittee before Memorial Day, the bill is expected to go to the House floor in late June. A companion measure in the Senate is scheduled for a Banking Committee hearing June 20, with final floor action possible before Congress heads home for elections in early October.

Why the exceptionally broad support? Several reasons: The FHA, which pioneered the now-ubiquitous 30-year, fixed-rate mortgage seven decades ago, historically has been the largest source of mortgage money for modest-income, first-time buyers, especially African Americans and Hispanics.

In recent years, however, the FHA's product line has not kept pace with innovations in the conventional, nongovernmental sector -- mainly because the FHA lacked federal statutory authority to compete. The FHA typically offered credit-challenged, cash-deficient home buyers better consumer protections than subprime competitors, but it could not provide popular products such as no-down-payment loans; "risked-based pricing," which would allow monthly payments and upfront loan fees to vary according to the perceived credit risk of the home buyer applicant; and new "affordability" concepts ranging from interest-only plans to 40-year payback terms.

The FHA's maximum mortgage limits frequently are too low for many home buyers in high-cost, high-volume real estate markets such as California, New England, New York, the mid-Atlantic states and metropolitan Washington. Last year, according to the National Association of Realtors, just 34 FHA-insured mortgages were closed in Los Angeles, primarily because even small starter houses for first-timers were more costly than the FHA's federally set mortgage limits.

Private competitors, by contrast, had no such legal constraints and were free to offer "jumbo" loans with low down payments and interest-only terms. But those same subprime mortgages came without the FHA's consumer protections. To cite one example: Subprime lenders often use heavy prepayment penalties to discourage customers from refinancing out of their high-cost loans during the first three years. FHA-insured loans never carry prepayment penalties.

The new bill would give the FHA broad authority to offer a wide variety of insured home-loan types, and would raise maximum loan amounts to each metropolitan area's median home price. In many parts of California, that would move the FHA loan ceiling above $500,000. In other high-cost areas of the country, FHA mortgages could exceed $400,000. For example, using first-quarter 2006 median price data, the limit in the Washington area would zoom to $425,000; in Boston to $413,000; in metropolitan New York-Long Island to about $465,000; in San Diego to $604,000; and in San Francisco to $715,000.

The bill would also allow the FHA to price mortgage insurance fees on a risk-based sliding scale. Buyers with good credit histories could make small or no down payments, and pay lower mortgage-insurance premiums than applicants with spotty credit profiles.

If passed before Congress heads home for elections, the bipartisan legislation could begin to have immediate effects in major markets across the country. Instead of being forced into high-cost, high-pain subprime loans with fewer consumer protections, home buyers could find the FHA a serious alternative again.

Kenneth R. Harney's e-mail address is

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