Moderate-income homebuyers got a big boost from Congress at the end of July, when the House voted 415-7 to approve a bill revitalizing the federal government's biggest mortgage program - the Federal Housing Administration.
The bill, which now awaits Senate action, would allow the FHA to offer zero-down-payment loans for the first time, increase permissible mortgage amounts substantially in high-cost markets, and provide low interest rates and consumer protections that are rarely available from "subprime" mortgage lenders.
The legislation would also effectively open the FHA marketplace to mortgage brokers, who are by far the largest source of home mortgages originated nationwide.
With brokers able to offer both private-market subprime and FHA-insured mortgages, buyers with less-than-perfect credit will be able to directly compare FHA's rates, fees and consumer protections with competing subprime loan offerings.
For example, rather than paying 9 percent for a low- or no-down-payment mortgage with a hefty prepayment penalty from a subprime lender in the current market, a buyer might be able to obtain a low- or no-down-payment FHA mortgage for 6.5 percent or 7 percent with no prepayment penalties.
FHA mortgages also come with guaranteed "loss-mitigation" protections requiring lenders to pursue remedial steps whenever borrowers fall behind on payments, rather than rushing to foreclose.
Private subprime lenders, by contrast, often have no mandatory remedial responsibilities. Miss a few payments and you are toast.
The House bill, the "Expanding American Homeownership Act of 2006" (H.R. 5121), would reopen the FHA program to consumers in large swaths of the country where home prices far outstrip statutory limits on maximum FHA mortgage amounts.
The Fannie Mae-Freddie Mac limits move up annually as home prices increase.
Rep. Maxine Waters of California, one of many liberal Democrats who joined with Republicans in support of the bill, estimates that more than 120,000 residents of her state lost the opportunity to apply for consumer-friendly FHA mortgages over the past six years solely because home prices in the state exceeded the FHA's limits.
Similar squeezes occurred in high-cost New England, New York, Washington, D.C., and Florida markets, which would all now track the Fannie-Freddie limits under the bill.
Nationwide, the FHA's share of the total market declined from approximately 11 percent in the mid-1990s to just above 3 percent last year - primarily because of statutory limitations on the agency that allowed subprime lenders to siphon off many of the FHA's best customers.
Another key change: the FHA would join the rest of the mortgage market in underwriting homebuyers based on their risks of default as measured by credit scores, down-payment amounts and financial profiles.
The bill would authorize the agency to charge lower insurance premiums to applicants with lower risks of default - a standard operating procedure in the private marketplace.
By the same token, borrowers presenting high risks - low credit scores and histories of prior defaults - could be charged higher premiums than they are today.
Though the bill enjoyed almost unprecedented bipartisan support in the House and carries the strong endorsement of the White House, it faces tougher sledding in the Senate.
The Senate's housing subcommittee, which has immediate jurisdiction over the bill, is chaired by Republican Sen. Wayne Allard, of Colorado, who is skeptical about the FHA's capacity to handle risk assessments on credit-challenged homebuyers.
Sen. Richard C. Shelby, the Alabama Republican who chairs the banking panel, agrees on a go-slow approach. Both are considered allies of the private mortgage insurance industry on the issue, some of whose members are lobbying aggressively behind the scenes to block any revival of the FHA.
But the legislation has strong Republican backers in the Senate, including Jim Talent of Missouri, prime sponsor of the Senate version (S. 3535); John Cornyn and Kay Bailey Hutchison, both of Texas; Johnny Isakson and Saxby Chambliss, both of Georgia, and former Housing and Urban Development Secretary Mel Martinez, now representing Florida.
FHA Commissioner Brian D. Montgomery says he has full confidence in his agency's ability to assess credit risks - something it has done for decades at no cost to the federal Treasury. In fact, the FHA makes money for the government every year. Montgomery believes that passage of the bill before Congress heads home for elections is "essential" in a market environment where financially stretched homebuyers need the lowest rates and best consumer protections available. "We think we are on the side of the consumers," Montgomery said in an interview after the House vote.
The only question left is whether the Senate will let the FHA serve growing numbers of those consumers.