FHA Loan Expansion Heading To a Vote
Friday, December 14, 2007
Hundreds of thousands of minority and moderate-income home buyers would become eligible to get low-rate, low-down-payment mortgages insured by the federal government under an agreement struck yesterday in the Senate.
The measure, which had been held up by a lone senator, Republican Tom Coburn of Oklahoma, is expected to get a full floor vote today or Monday. It would greatly expand the Federal Housing Administration's mortgage insurance program that helps people with questionable credit get low-interest home loans.
The delay of the bill drew the ire of the Bush administration and House lawmakers on both sides of the aisle, as the pressure increased on the federal government to address the worsening mortgage crisis. The House passed its version in September, 348 to 72.
The legislation aims to draw people away from subprime loans, which offer low "teaser" rates that can jump as high as 11 percent after two or three years. By the summer of 2010, about 600,000 people with such loans are expected to lose their homes because they will not be able to make the higher monthly payments.
FHA Commissioner Brian Montgomery said his agency's program could "fill the void" as the subprime market continues to unravel.
"A lot of people who went the subprime route should have come to FHA," Montgomery said. "Sadly, some of them are coming to us now after" their interest rates have reset.
The FHA typically insures mortgages of about $130,000 for qualified home buyers, who are required to make a down payment equal to only 3 percent of their loan amount. About a third of its customers are minorities. Most earn about $55,000 a year.
The Senate bill would lower the down payment requirement to 1.5 percent and allow the FHA to insure mortgages up to $417,000, which would broaden its reach to more-expensive housing regions such as the Washington area, said four congressional aides who spoke on condition of anonymity in advance of the Senate vote.
Last year, the FHA got nearly 680,000 applications from home buyers. This year, it is on pace to receive 1.4 million, as exotic and adjustable-rate loans have fallen out of favor among lenders.
The FHA, part of the Department of Housing and Urban Development, does not rely on public funds to provide mortgage insurance and covers its costs by charging a fee to home buyers, normally about 1 percent of their mortgage amount. The Senate bill would raise the ceiling on that fee to 3 percent. FHA officials said the higher fee would allow them to charge more to less-credit-worthy borrowers.
The FHA rarely offers insurance for adjustable-rate mortgages. "We back the 30-year-fixed rate, garden variety, plain vanilla mortgage," Montgomery said. "No one has ever called the FHA and said, 'I don't understand my mortgage.' "
Last week, the Bush administration announced a plan that would freeze subprime mortgage rates for homeowners for five years to give them time to refinance before their rates reset. The FHA insurance program offers an easy option for these homeowners to refinance, administration officials have said.
The bill was opposed by Coburn, who was concerned it would encourage risks by the FHA, one of his aides said. He also was unhappy over the lack of debate -- Senate Democrats wanted to hold a quick vote on the matter. By yesterday, one of his top aides said, Coburn's concerns had been allayed.
Coburn "is grateful that congressional leaders have given him the opportunity to debate this bill on the floor," said John Hart, a spokesman for the senator.
The bill should pass by a wide margin, another aide on the Senate Banking Committee said. "The road has been paved for final passage," the aide said.