FHA was created in 1934 to give homebuyers a shot at owning an affordable home. Per The Department of Housing and Urban Development more than 34 million families have been helped by the FHA programs over the years. With it's stated goal to allow families access to affordable housing. However, recent run-ups in home prices many families have been locked out of the process as FHA loan limits are far below median home prices in far too many areas. This means FHA cannot help those borrowers to get into a median priced home. Over the years, FHA has been able to implement programs that have stood the test of time. The areas of borrower counseling, budgeting, credit direction have all been a firm foundation for providing mortgage loans. The insurance aspect of the mortgage can help offset defaults and/or foreclosures. It is a program that has worked in the past and is sorely needed now. With FHA insuring mortgage loans there is little risk to lenders losing money in case of default. Thus more money to lend.

Now with subprime under extreme pressure and many lenders in this product area have shut their doors and simply gone out of business. With heavy foreclosures the secondary market buyers have turned a cold shoulder to any new loans with high-risk parameters. Fannie Mae and Freddie Mac have been reeled in to further limit high-risk loans in their portfolios. Any volatility in their respective combined 1.3 trillion portfolios would cause tremendous financial fallout in the other financial markets. Federal Reserve Chairman Bernanke is urging more conservative lending and to maintain a little steadier course steering out of the big risk waves which could bring harm to all US markets and beyond.

What tends to quickly glaze the eyes of lenders and mortgage brokers combined with frequent head slaps to the forehead are the incredible required levels of company qualification and compliance just for the privilege of doing any FHA business. This is very expensive to stake out this privilege. If FHA would chose to streamline broker participation and high compliance costs, more loans would be originated. Thus, when subprime mortgages became very attractive to lenders and brokers who were trying to assist borrowers to get into their homes of choice, that's just what they did. These programs were provided instead of FHA. As it turns out, many of these loans had low rates going in, but would accelerate in say two years with many payments wrecking havoc with family budgets. Some of these were 2/28 ARMs which gave borrower a two-year fixed rate then moving to an adjustable. As rate increases were pegged to things like the 6 month LIBOR (London Interbank Offered Rate) plus a margin that may be in the 6% to 7%+ range it guaranteed the loan payments would accelerate dramatically after two years.

As an example: The start rate could be in the 7.50% range for the first two years. With a LIBOR index, as an example at 4.75% and the margin at 7.00% = 11.75%. It might take two years to get there after the adjustment period but going up 1% every six months could dramatically effect the monthly payment. If the mortgage were $200,000 with a start rate of 7.50% on a thirty-year term the start payments would then be $1,398.43/month. At the fully index rate of 11.75% the payment would move to $2,018.82/month. This is a payment increase of $620.39/month. For some borrowers, that is way more than they would be able to handle. Complicating this further, to avoid Private Mortgage Insurance (PMI) for any loan above 80% Loan To Value (LTV), simultaneously closed second mortgages were placed with many of those rates running from 10% to 13% which would allow for a Combined Loan To Value (CLTV) of 100%. Any first time homebuyer purchase can trigger expenditures for landscaping, furniture, and decorating upgrades then the payment increases come along and borrowers become shadowed by the eight ball.

Alphonso Jackson, HUD Secretary, proposed in June of 2006 certain changes that would once again position FHA as the first choice of first time homebuyers, which could bring them reasonable certainty of a monthly housing expense. With the mid-term elections things were put aside for other issues such as the war, minimum wage other items closer to the front burner. As things settle in industry proponents are hoping Congress will once again take a look at Secretary Jackson's proposal. Originally, there was a bipartisan support. It is thought that still is the case. In brief, loan limits in high cost areas would be closer to the Fannie Mae and Freddie Mac upper loan limits. Right now, the upper limit is $417,000.00. As reported FHA Release 06-069 this might be 87% to 100% of that limit. Presently, FHA in some cases are $200,000.00 away from that limit and as a result, homebuyers are closed out of those communities from even considering an FHA loan with all that brings with it. In lower cost areas, the FHA limit might be in the 48% to 65% of the GSE (‘Government Sponsored Entity'-Fannie Mae-Freddie Mac) upper loan limits. This would be a big boost to making the program attractive to homebuyers. This proposal has been called "The Expanding American Homeownership Act" and has been laid out in H.R. 5121, representing the House of Representatives version. It was introduced April 6, 2006 and received bipartisan support with at the time 67 cosponsors and was approved by the House Financial Services Committee.

Additional provisions of the bill would be the elimination of the currently required minimum 3% investment. Alternative mortgage products are offering more attractive down payment requirements. The new proposed rules would allow for a variety of down payment options making FHA a little more user friendly. Another element of the H.R. 5121 proposed bill would be matching risk with various mortgage insurance premiums. Currently, the mortgage amount has 1.50% added on top for the Up Front Mortgage Insurance Premium or UFMIP. On a loan of $200,000 that would add $200,000.00 x 1.5% = $3,000.00. Then the new loan would be $203,000.00. A monthly MIP or Monthly Insurance Premium of .5% is added into the payment. The UFMIP and MIP all would go into a risk insurance pool to pay for defaults. The monthly MIP would be $203,000 x .5% = $1,015.00/12 = $84.58/month to the payment. If the home is sold or other non-FHA financing is put in its place within the first 84 months a portion of the UFMIP would be refunded to the borrower based on a published sliding scale. The $3,000 added UFMIP would add approximately $17.99/month on a 6.00% mortgage. In spite of these add-ons this FHA program can be far superior to any adjustable rate subprime loan.

In summary, if Congress could get back on track to finalize the proposed HUD changes, which had bipartisan support before the mid-term elections, many positive benefits could accrue to borrowers. These would be lower and predictable interest rates, higher lower limits, lower down payments with the FHA program layered over the whole mortgage product to ensure better borrower performance. Loan counseling, family budgeting, and close interaction can all help home buyers achieve their housing dreams and avoid problems down the road. If this bill was enacted it could go a long way to alleviate the down and negative pressures on subprime loans and riskier loans in the Fannie Mae and Freddie Mac portfolios. Homebuyers could use the steady hand of FHA to make their homeownership a reality. FHA has been priced out of many markets. Now FHA is needed more than ever. Homebuyers would welcome action on FHA.

Dale Rogers
http://www.brokencredit.com