Senate lawmakers don’t want to take FHA modernization as quite as far as the House, passing legislation that would reduce but not eliminate down-payment requirements, allow for a smaller increase in the maximum-size mortgage eligible for FHA backing, and place a one-year moratorium on a plan to introduce risk-based pricing.
SB 2338, which passed in the Senate Friday with only one dissenting vote, would allow the Federal Housing Administration to guarantee loans of $417,000 or more in high-cost areas, the conforming loan limit for loans eligible for repurchase by Fannie Mae and Freddie Mac.
Legislation passed by the House in September, HR 1852, would allow FHA to insure loans up to 175 percent of the $417,000 conforming loan limit — $729,750 — or 125 percent of an area’s median home price, whichever is less.
The Bush administration supports the more modest increases in FHA loan limits put forward by the Senate, advocating raising limits from $362,000 in high-cost areas to $417,000, and from $200,000 in lower-cost areas to $271,000.
The House bill would also give FHA the flexibility to waive current 3 percent down-payment requirements for first-time home buyers, and green-light aspects of a Bush administration plan to introduce risk-based-premium pricing.
Risk-based pricing would allow FHA to charge higher premiums to some borrowers who might not previously have qualified for loan guarantees.
The Senate bill would maintain a 1.5 percent minimum down-payment requirement on FHA loans, and place a 12-month moratorium on the implementation of a pilot program to test risk-based pricing.
The White House issued a statement Friday saying it was pleased with Senate passage of the bill, but that “some concerns remain” with both the House and Senate plans for FHA modernization.
“The president believes FHA should be able to design mortgage products that can help at-risk borrowers, reward borrowers with good credit histories, and protect taxpayers with actuarially sound financing,” the White House said, referring to its plans for risk-based pricing.
Differences in the bills must be ironed out in a House-Senate conference committee before it can be sent to the president to sign into law.
Risk-based pricing and more flexible down-payment requirements would allow FHA to serve an additional 200,000 families a year, the administration has said.
That’s on top of about 240,000 loan refinancings the U.S. Department of Housing and Urban Development hopes to complete through the administration’s new FHASecure program, which allows qualifying borrowers who are in default on an adjustable-rate mortgage to refinance into a fixed-rate loan.
The administration’s previously stated problems with the House bill include proposed limitations on premium increases to be introduced under risk-based pricing.
FHA plans to introduce risk-based pricing on a limited basis in January, saying it will allow it to serve a wider pool of borrowers with lower credit score and down-payment requirements. While HR 1852 would allow the pilot program to be expanded to serve more borrowers, the House wants a statutory cap on annual premiums, and says FHA should refund the extra amount charged borrowers with FICO scores below 560 if they make loan payments for more than five years.
The administration also objects to the House’s plan to siphon revenue that would be generated by expanding FHA loan guarantee programs for a new Affordable Housing Grant Fund. The administration maintains FHA receipts are already credited toward HUD appropriations and any diversion of revenue would only reduce resources available for other programs that assist low-income families.
In other action Friday, the Senate approved a bill that would extend an existing tax deduction for private mortgage insurance for three years, and protect homeowners from having to pay taxes on debt forgiven by a mortgage lender through a workout or short sale.
SB 1394 was approved as an amendment to a similar House bill, HR 3648. That bill would have recouped $2 billion in expected lost tax revenue over the next 10 years by tightening the rules for claiming deductions on the sale of a second home, vacation or rental property converted to a primary residence. SB 1394 eliminates that provision, which was opposed by the Bush administration.
The tax breaks proposed by SB 1394 (and now HR 3648, as amended) would sunset after three years, and be offset by increased penalties and upfront payments of estimated taxes for corporations. The House must agree to the amendment and approve the updated bill before it can be sent to the president to sign into law.