A congressional subcommittee is holding a hearing this morning in Washington, D.C., to examine modernizing the Federal Housing Administration.

The Bush administration’s 2007 budget proposes comprehensive reform for the Federal Housing Administration’s single-family mortgage insurance. Under this proposal, mortgage insurance premiums will be based on the borrower’s credit history, loan-to-value ratio, debt-to-income ratio, and on FHA’s historical experience with similar borrowers. The administration believes that this change will decrease premiums for many of FHA’s traditional borrowers, thereby increasing their access to home ownership.

“The mortgage market has changed dramatically in recent years, creating what is today the world’s most sophisticated real estate finance system,” Rep. Robert Ney said in a statement. “Since its inception in 1934, FHA has played an innovating role in financing home ownership and affordable housing opportunities for all Americans.”

The FHA was created by the National Housing Act of 1934 to broaden home ownership, protect lending institutions, and stimulate the building industry. Prior to its creation, mortgages did not exceed 50 percent of the home value and did not extend past the fifth year. At the end of the five years, mortgages had to be paid or renegotiated. The FHA program was established to provide stability and liquidly in the market. Its creation fostered the 30-year mortgage product and led to standardized mortgage instruments.

The FHA provides only mortgage insurance for those loans that meet FHA-established underwriting standards. Since 1934, FHA has insured more than 33 million loans and is the largest insurer of mortgages in the world.

The National Association of Home Builders trade group supports efforts to reform FHA’s single-family mortgage insurance programs.

Testifying today before the House Financial Services Committee’s Housing and Community Opportunity Subcommittee, Jerry Howard, executive vice president and CEO of the National Association of Home Builders, said that statutory and regulatory constraints have limited the FHA’s ability to respond to the needs of borrowers, according to an announcement from the group.

“All too often, the differences between the FHA’s requirements and those for conventional mortgages have been viewed by lenders, appraisers and others as a disincentive to use FHA programs,” said Howard. “And FHA’s unique and often burdensome requirements have caused many home builders to avoid using its programs to build homes that otherwise would have been well-suited to borrowers who planned to use FHA-insured mortgage loans.”

Howard added that important strides have been made to revitalize the FHA under the stewardship of FHA Commissioner Brian Montgomery, who assumed his office last June.

“Acting with the support of HUD Secretary Alphonso Jackson, Commissioner Montgomery’s efforts are already being realized as the FHA has aligned its appraisal requirements by eliminating needless paperwork requirements. Other steps that have made the program more user friendly are the FHA’s new policies that increase the allowable loan-to-value ratio for cash-out refinancing transactions and revisions to the 203(k) rehabilitation program.”

Despite these positive changes, Howard told lawmakers that FHA’s loan structure and down-payment requirements, which are established by Congress, seriously constrain its ability to deliver the range of mortgage products that are needed to fulfill its housing mission.

“To meet the needs of unserved and underserved families who desire to purchase a home, NAHB believes that Congress should grant the FHA broader authority outlined in the administration’s fiscal 2007 budget proposal and detailed in draft authorizing legislation,” said Howard.

Specifically, NAHB is urging Congress to: increase the current limit for FHA-insured mortgages, grant the FHA flexibility to establish down-payment requirements, allow FHA to establish a risk-based mortgage insurance premium pricing structure, permit the FHA to extend the maximum loan maturity to 40 years, and to revise the FHA’s requirements for condominium loans.

Also scheduled to testify at today’s hearing were Brian Montgomery, assistant secretary and housing/federal housing commissioner with the Department of Housing and Urban Development; Stella Adams, board member of the National Community Reinvestment Coalition; Regina Lowrie, chairwoman of the Mortgage Bankers Association; and A.W. Pickel, III, president and CEO, Leader One Financial Corp., testifying on behalf of the National Association of Mortgage Brokers.

The Subcommittee on Housing and Community Opportunity, chaired by Rep. Robert W. Ney, R-Ohio, is holding the hearing.

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