It's high noon for the Federal Housing Administration-insured home loan program as various factions of Congress and the Bush administration prepare for a shootout over its future.
The popular FHA program, which last year accounted for roughly one in seven mortgage originations nationwide, carries lower down payment requirements than privately insured mortgage programs.
But practically everyone agrees on the need to do something to stem losses in the FHA mutual mortgage insurance fund, which insures low down payment mortgages for single-family homes and condominiums.
The objective is to reverse the trend that saw the fund's worth drop
to $2.6 billion last year from $8 billion in 1980. At that rate, the fund would become insolvent within 10 years, according to an actuarial study released in June.
However, the warring blocs have different cures in mind.
The competing plans differ in regard to which FHA borrowers should shoulder proposed price increases for the default insurance and in regard to the amount of money a presumably cash-strapped buyer has to bring to the closing table.
A lot is riding on the FHA debate because it threatens to hold up approval of more comprehensive housing legislation in which the FHA provision is contained. The larger housing bill also covers such matters as a new low-income housing construction program and preservation of existing subsidized housing from the threat of mortgage prepayments by private owners.
After two weeks of sporadic meetings, a House-Senate conference committee is now scrambling to reach a compromise for the full Congress to approve before adjourning at the end of next week.
On one side, the Senate and the Department of Housing and Urban Development teamed up in June to push through a plan that retains the current upfront insurance premium of 3.8 percent of the mortgage amount. It levies a new 0.5 percent annual risk premium against borrowers making less than a 10 percent down payment. The lower the down payment, the longer the borrower pays the annual premium, up to a maximum of 15 years.
The Senate plan also reduces the amount of closing costs a borrower can finance to roughly one-third of the total. Currently, borrowers can roll the full amount of closing costs into the loans.
The House, however, ignored the administration's wishes when it passed an alternative plan in July. The House version calls for all future FHA borrowers to share in the rescue by adding a 0.6 percent annual premium over the life of the loan.
The House proposal, backed by several housing trade and consumer groups, would continue to let borrowers finance all of their closing costs. However, it actually ends up lowering the amount of cash borrowers must bring to the deal by shaving the upfront premium to 1.35 percent from 3.8 percent.
On a $100,000 loan, for example, the Senate plan would push the cash closing costs up from the $5,650 currently required to $7,000, according to a Consumers Union analysis. The House version would keep the out-of-pocket expense down to the same $5,650 as at present.
HUD estimates that the Senate plan would eliminate 35,000 households nationally that currently could obtain a mortgage from the FHA program. The Mortgage Bankers Association of America, however, believes the lost business will come closer to 100,000 buyers.
In recent weeks, President Bush has threatened to veto the housing bill if the House plan should prevail. A HUD spokesman said no HUD official involved in the bargaining was willing to comment on the status of the negotiations.
Donald W. Campbell, staff director of the Senate's housing subcommittee, is among insiders who believes that by today the conferees will reach an agreement to leave enough time for the full Senate and House to ratify the decision next week. Campbell declined to speculate what he thinks will happen other than to say "we have got to find some option in the middle" of the Senate and House plans.
Frank T. DeStefano, staff director of the House housing subcommittee, agreed bargainers are close to an understanding.
"Assuming there is a spirit of compromise, the only thing that could hold this up is if the option chosen has not been run through the model" developed by the accounting firm of Price-Waterhouse to project revenues and the probability of borrower defaults under that scenario, he said.
The conferees apparently are leaning toward structuring the loan premium on a "pay-as-you-go" basis by whittling down the upfront premium to between 1.35 percent and 2.6 percent of the loan amount and making up the difference in an annual premium in the 0.5 percent to 0.6 percent range.
The bargainers may also agree to build a risk element into the annual premium by charging those with lower down payments another 0.1 percent to 0.2 percent extra each year. Less clear is how much of the closing costs borrowers will finance.
Whatever the bargainers raise through a new premium structure to shore up the FHA fund will also count toward the $2.5 billion in savings the FHA must achieve as part of the federal deficit reduction plan.