FHA changes make housing bill a 'mixed bag'

President Bush signed historic legislation today that props up mortgage financers Fannie Mae and Freddie Mac and authorizes a $300 billion expansion of Federal Housing Administration loan guarantee programs.

But the sweeping housing bill, HR 3221, inevitably has its critics — including Housing Secretary Steve Preston, who’s unhappy that Congress has placed a one-year moratorium on the use of "risk based" premium pricing for FHA loan guarantees. Home builders are also bracing for the elimination of seller-funded down payment assistance with FHA-guaranteed loans beginning Oct. 1.

Others in the housing industry are lamenting that a $7,500 tax credit for first-time homebuyers that will expire July 1, 2009, must be repaid over 15 years — making it, in effect, an interest free loan. The National Association of Home Builders and other industry groups are nevertheless working to publicize the tax credit to consumers, with NAHB rolling out a dedicated Web site, FederalHousingTaxCredit.com.

“The tax credit is the best stimulative measure,” NAHB President Sandy Dunn said in a press release. “It will increase housing demand, get home buyers back into the marketplace and fight falling home prices, which threaten the economy as a whole.”

HUD Secretary Preston last week called HR 3221 "a mixed bag," because it places a moratorium on the use of risk-based pricing on FHA loan guarantees for one year. The moratorium begins Oct. 1, 2008 and ends Sept. 30, 2009.

Preston said FHA will now be required to increase prices on all customers “or eliminate its refinancing program for subprime borrowers at a time when they need it the most."

HUD just rolled out risk based pricing on July 14, saying it would allow FHA to operate more like other insurers, saving lower-risk borrowers money and averting the need for a taxpayer bailout of what has traditionally been a self-sustaining program (see story).

Under the old pricing structure, all borrowers paid 1.5 percent of their loan balance up front, and 0.5 percent a year for FHA insurance, regardless of their credit standing. Under risk-based pricing, the upfront premium ranges from 1.25 percent to 2.25 percent. On a $150,000 mortgage, the difference between the old 1.5 percent upfront premium and the maximum 2.25 percent "risk based" premium is about $7 per month.

The Bush administration had pushed for risk-based pricing as part of a larger "FHA modernization" package that, in various proposals put forward by lawmakers in recent years, would also have reduced or eliminated FHA’s 3 percent minimum down payment requirement.

Instead, Congress ended up raising minimum down payment requirements for FHA-backed loans to 3.5 percent. Also, beginning in October, home buyers will no longer be able to rely on nonprofits that funnel money from homebuilders into seller-funded down payment assistance programs, as HR 3221 finalizes HUD’s long quest to end the practice.

HUD claimed the practice artificially inflates home prices and triples the likelihood of default. HUD’s attempt to end the practice through an administrative proceeding was thwarted by legal challenges filed by nonprofits that operate assistance programs (see story).

Now that Congress and the Bush administration have agreed to ban the practice through legislation, that battle appears to be over, and home builders expect to see the pool of eligible buyers shrink.

According to HUD, seller-funded down-payment assistance was used on more than 35 percent of all home purchase loans insured by FHA in fiscal year 2007, compared to less than 2 percent seven years earlier.

Home builder Lennar Corp. relied on down-payment assistance for one in three mortgages it originated in the second quarter, the Wall Street Journal reported. Housing research firm Zelman & Associates estimates that eliminating seller-funded down-payment assistance could reduce the homebuyer pool by 10 percent nationwide, and by up to 25 percent in lower-priced markets where they are used more often, the Journal said.

"It is certainly not in a builder’s interest to have a recently sold home to return to the market through foreclosure," NAHB said in a July 10 letter to Senate Banking Committee chairman Sen. Chris Dodd, D-Conn., and ranking member Sen. Richard Shelby, R-Ala. " That is why NAHB is committed to finding ways to continue seller-provided down-payment assistance in a manner that is in the best interest of home buyers, builders and the FHA."

Other key provisions of HR 3221 relating to FHA modernization include streamlined processing for FHA condos, reforms to the home equity conversion (reverse) mortgage program, and reforms to the FHA manufactured housing program, according to a summary by the National Association of Realtors.

A $300 billion expansion of FHA loan guarantee programs is intended to help troubled borrowers refinance into more affordable loans when their existing lenders agree to forgive part of their debt. Lenders would effectively write down existing mortgages to 85 percent of their current appraised value, and borrowers would have to share gains with the FHA if they later sold at a profit.

The Congressional Budget Office has estimated the program might help 400,000 borrowers, and cost $680 million over 10 years. HR 3221 creates a new assessment on Fannie Mae and Freddie Mac that’s expected to cover those costs and also provide money for affordable housing.

The bill also creates a new independent regulator for Fannie Mae and Freddie Mac and authorizes the Treasury Department to buy the companies’ debt or stock. The Congressional Budget Office estimates that there’s a better than even chance Fannie and Freddie won’t require government assistance, but that the cost to the government might be $25 billion if they do.

The bill allows Fannie and Freddie to purchase or guarantee loans of up to 115 percent of the local area median home price in high cost areas, up to $625,500. The conforming loan limit for normal markets remains $417,000.

The bill increases the floor for FHA loans to a minimum of $271,050, and allows it to guarantee loans in high cost markets up to 115 percent of local area median home price, with a $625,500 cap.

The caps in high cost markets go into effect on Jan. 1, when the current, temporary cap of $729,750 for Fannie, Freddie and FHA expires.

William Brown, president of the California Association of Realtors, welcomed the extra leeway for Fannie and Freddie to buy mortgages above the old $417,000 conforming loan limit in high cost markets.

“Although we would have liked Congress to make permanent the (temporary) $729,750 loan limit, C.A.R. is pleased with the new permanent loan limit of $625,500,” Brown said. “It will allow California homeowners to refinance their loans into safe affordable loan products and allow first-time home buyers to enter the market.”

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