New protections for home mortgage borrowers contained in the federal housing bill passed by Congress last week would take effect when collection rights for a given loan are sold to another financial institution, not as stated in Saturday's Real Estate section. (Published 10/30/90)

The imminent passage of a federal housing bill will put a popular government-backed mortgage program beyond the reach of many first-time buyers, but will provide a new assortment of home financing breaks.

One of the more disputed provisions of the bill raises the insurance premium for Federal Housing Administration-insured mortgages, nearly doubling the fee for the riskiest buyers who make the lowest down payments.

At the same time, the upfront costs of securing an FHA mortgage will increase to discourage future defaults because borrowers will have a larger cash stake in their properties.

The FHA changes would go into effect 90 days after President Bush signs the law, which he is expected to do. That would make the likely implementation date sometime in February.

The reforms were prompted by recent losses of $350 million a year in the FHA loan fund, said John C. Weicher, a Department of Housing and Urban Development assistant secretary. The anticipated accumulation of reserves under the new scheme should also offset higher borrower defaults, he added.

The new FHA insurance plan effectively raises the overall premium from 3.8 percent of the loan amount to 5.5 percent to 7.25 percent, depending upon the down payment involved, Weicher said.

Although the new law will lower the upfront insurance premium to 2.25 percent of the loan amount from 3.8 percent, when the changes are fully phased in after five years, it saddles borrowers with annual renewal premiums they currently do not have to pay.

The FHA reforms would also require borrowers to pay in cash 43 percent of loan costs that would cover such settlement services as the appraisal, title insurance and deed registration. Borrowers now can roll the full amount of the closing costs into the loan amount.

Under the new plan, the closing costs on a $125,000 home financed with a minimum $5,875 down payment would require the borrower to pay $1,612 more at closing. When the changes are fully implemented, the upfront premium would drop by $1,938, but the borrower must pay an annual premium of $684 for the 30-year life of the loan.

The FHA program, which last year accounted for about one in seven mortgage originations nationwide, insures mortgages of up to $124,875 for single-family homes and condominiums.

The new law also would permanently extend the $124,875 FHA loan limit. The ceiling was last raised 12 months ago from $101,250.

Many home buyers prefer the FHA program to privately insuredmortgage programs because FHA borrower-approval standards are more lenient and the down-payment requirements are not as stringent.

The changes, however, will prevent thousands of borrowers who today could take advantage of the program from doing so. On the high side, the Mortgage Bankers Association of America calculates the revisions will lock out 100,000 to 250,000 borrowers annually. National groups representing home builders and real estate brokers project 60,000 will lose out.

HUD puts the best face on the changes. Weicher said he believes 20,000 potential FHA buyers will be excluded from the loan program and only until they have had some time to save enough for the increased cash closing costs.

Home buyers of moderate means may eventually find some relief in a plan contained in the bill to establish a National Housing Trust Fund that will subsidize interest rates down to 6 percent or provide down-payment assistance. Eligibility is limited to borrowers who fail to qualify for a market-rate mortgage on the basis of income. The household's income also cannot exceed 115 percent of a high-cost area's median income, which in the Washington market would put the limit at $54,477.

The borrower must make a 1 percent down payment and agree to repay the assistance when the house is eventually sold. Although the program is limited to first-time buyers, the new law also includes displaced homemakers.

Congress is unlikely to authorize major funding for the trust until fiscal 1992. The bill authorizes $520 million for the program at that time.

Rep. Henry B. Gonzalez (D-Tex.), the author of the trust plan, characterized the effort as a "beginning" to help first-time buyers who have been "shut out {of federal housing assistance} for five to six years in a row."

Older homeowners stand to benefit from a change that expands a reverse mortgage demonstration program starting next year. The new law would enable 25,000 homeowners 62 or older to cash out the equity built up in their homes on either an installment basis or collect it as a lump sum. Repayment is generally not due as long as the borrower lives in the home without selling it.

The new law also gives some new ammunition to homeowners when their mortgage is sold to another lender. Under the plan, lenders will face stiff financial penalties for failing to give borrowers 15-day advance warning that their mortgage is changing hands.

The old and new lenders must provide toll-free telephone numbers and name the appropriate person to handle borrower inquiries or complaints.

If a borrower sends a mortgage payment on time but to the wrong lender, the plan requires the waiver of any late fees for 60 days following the loan transfer.

Lender penalties include actual damages and, where there is a pattern of practice of noncompliance, punitive damages of up to $1,000 per individual homeowner. Class action suits can drive the fines up to $500,000 or 1 percent of the lender's net worth, whichever is less.

Michelle Meier, government affairs counsel for Consumers Union, said the consumer protections incorporated in the new mortgage transfer standards suffer from the failure to require lenders to inform homeowners of those new rights.

In other FHA program-related changes, the law also narrows what some consumer advocates claim are pricing practices that discriminate against borrowers who take out small FHA mortgages of about $50,000 or less.

The lawmakers agreed that a lender cannot impose more than a two-percentage-point variation in the amounts charged for lending fees for varying-sized loans.

The new housing bill also contains some potentially good news for homeowners who need financing for remodeling projects. It tentatively raises the Title 1 home improvement loan limits from $17,000 to $25,000. The increase, though, is not scheduled to go into effect until June, and then only if a report gives that insurance fund a clean bill of health.

Vacation home buyers, under the new law, can no longer turn to FHA for financing.

HUD championed the change both to stem losses in the FHA program and on the philosophical grounds that the program is "more appropriately targeted" to first-time, lower-income buyers than vacation homeowners, Weicher said.