Easing of FHA loan limits gains wide Hill support



In a recent column on legislation to expand Federal Housing Administration mortgages to more potential homebuyers, the maximum mortgage amount under the bill would be the median home price for any metropolitan area, but not to exceed the Fannie Mae-Freddie Mac limit, which is adjusted annually. The current limit is $417,000.

An unusual Capitol Hill alliance of liberal Democrats, conservative Republicans, commercial banks, real estate brokers, ethnic group lobbies, homebuilders and mortgage brokers is pushing for 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 (FHA) loans that carry flexible down payments as low as zero, no prepayment penalties and affordable rates and fees - unlike many sub-prime mortgages targeted to minority first-time buyers.

The coalition supports a bill co-sponsored by members of Congress who are polar opposites ideologically and rarely agree on anything. Called the Expanding American Homeownership Act of 2006 (HR 5121), the bill is jointly sponsored by Rep. Bob 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 A. McKinney, a liberal Georgia Democrat, and Rep. Katherine Harris, the conservative Florida Republican, and more than 50 other members of both parties.

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 hot-potato issue of banks owning and running realty brokerages.

Already approved unanimously by a subcommittee vote before Memorial Day, the reform 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 spectrum of 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, FHA's product line has not kept pace with innovations in the conventional, nongovernmental sector - mainly because FHA lacked federal statutory authority to compete.

FHA typically offered credit-challenged, cash-deficient homebuyers better consumer protections than sub-prime competitors. But the agency could not provide popular products such as no-down-payment loans, or "risked-based pricing," which allows monthly payments and upfront loan fees to vary according to the perceived credit risk of the homebuyer applicant.

Also lacking were new "affordability" concepts ranging from interest-only plans to 40-year payback terms.

Worst of all: FHA's statutorily prescribed limits on maximum mortgage amounts frequently are too low for many consumers in high-cost, high-volume real estate markets such as California, New England, New York, the Mid-Atlantic states and metropolitan Washington.

During 2005, 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 FHA's federally set maximum 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 sub-prime mortgages came without FHA's package of consumer protections. For example, sub-prime 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, on the other hand, never carry prepayment penalties.

The new bill would give 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 metropolitan area would zoom to $425,000; Boston to $413,000; metropolitan New York-Long Island to about $465,000; San Diego to $604,000, and San Francisco to $715,000.

The bill would also allow FHA to price homebuyers' mortgage insurance fees on a "risk-based" sliding scale.

Buyers with good credit histories could make little or no down payments, and pay less in 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.

Homebuyers could find FHA a serious alternative again.


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