Special to Realty/Builder Connection
Over the past eight years, the Federal Housing Authority has become less and less important.
Subprime lenders offering high-cost loans won away many of the moderate-income first-time homebuyers who used to count on an FHA guarantee to snare a mortgage.
Home prices rose far above FHA lending limits, set by Congress and unchanged for years. And though the agency streamlined some of its procedures, it still takes far longer than 24 hours to approve an FHA loan, unlike the instant gratification that lures eager buyers to hard-marketing subprime lenders.
The number of loans guaranteed by the FHA dropped two-thirds nationally from 1999 to 2006.
Now, the FHA’s resurrection may be at hand.
Legislation aimed at modernizing obsolete FHA loan standards is back in Congress, having died quietly last fall after passing the House.
Then, nobody much cared. They do now, says Megan H. Booth, senior policy representative for the National Association of Realtors.
“This is a critical window. There’s all this congressional concern about the subprime mess, with horror stories in every district. This is our time to get Congress to say: ‘If we can reform this program, we can give people a viable alternative that’s not risky like these crazy loans,” she says.
“How many hearings has Congress had this spring on subprime? A gazillion. FHA reform can’t be a bailout to subprime problems, but it can be a solution.”
Sweeping changes in the mortgage market this decade “shut them out. Now there’s an opening,” agrees Ann Grochala, director of lending and accounting policy for the Independent Community Bankers of America.
If the Expanding American Homeownership Act of 2007 does pass, it would allow the FHA to consider what consumers have to pay for loan guarantees as determined by their credit histories; increase the amount it guarantees and thus come closer to the cost of houses in more expensive, usually urban, markets; and make it easier to purchase condominiums with FHA loan guarantees, lowering the first step into homeownership in pricey areas.
The modernization bill would raise the limit to 100 percent of the loan limit allowed by mortgage purchasers Fannie Mae and Freddie Mac for high cost areas, and from 48 percent to 67 percent of the limit in lower-cost areas.
“If it were increased, it would provide more options,” says Delbert F. Reynolds, Wisconsin field office director for the FHA. “Loan limits aren’t the only issue. One of the points of modernizing is to do some catch up with other tools, like not requiring a down payment.”
That is one of the controversial provisions in the modernization proposal put forth by the Department of Housing and Urban Development, which includes the FHA: eliminating the requirement for a down payment of at least 3 percent. The new requirement would be some type of cash contribution by the buyer at some point in the purchase process.
If the modernization legislation passes, it might bring the FHA into the 21st century, where it faces more competition than ever for historically overlooked moderate-income homebuyers.
Suddenly sober subprime lenders have stiffened loan standards, to stanch losses and head off regulation, but they’re still making loans.
Meanwhile, local non-profits and city and state government agencies have expanded their own homebuying assistance programs.
Last fall, for instance, the Housing Authority of the City of Milwaukee quietly began selling rehabbed houses to buyers who qualified for housing subsidies but hadn’t been in those programs.
Even if the proposed changes are adopted, the FHA will remain just one voice in a chorus clamoring for the attention of first-time buyers, says Geoff Smith, director of research with the Woodstock Institute, a research non-profit based in Chicago.
“(The FHA) was designed to encourage banks to make loans to borrowers who couldn’t access them otherwise. Now there’s an abundance of access to credit, so the question is: Is the FHA still fulfilling a need?’“ he says.
“There are other agencies that have loan programs, that offer loan down payments, and that are targeting the portion of the subprime market with prime or close to prime. As a person who follows housing policy and finance, I don’t think of the FHA hardly ever,” Smith says.
There’s one market, at least, where the FHA’s appeal still shines.
Homeowners with failing finances due to subprime loans are flocking to the FHA’s new Loss Mitigation Program.
HUD reports that since last October, 36,500 families nationally have become new FHA borrowers as they escape the consequences of predatory loans.