Interest Rate Roundup

Friday, December 14, 2007

FHA expansion coming soon?

For some time, expansion of the Federal Housing Administration mortgage program has been discussed in Washington. Some officials have wanted to ease FHA's 3% down payment requirement, change the way FHA insurance fees are calculated and assessed, or increase the FHA loan limits. But reform went nowhere.

Now that the housing market is in a state of chaos and the availability of private subprime and Alt-A mortgages has tanked, momentum has shifted in the reformists' favor. The Washington Post reported today that the Senate is finally close to voting on a reform bill (one has already been passed by the House). Some details:

"The Senate bill would lower the down payment requirement to 1.5 percent and allow the FHA to insure mortgages up to $417,000, which would broaden its reach to more-expensive housing regions such as the Washington area, said four congressional aides who spoke on condition of anonymity in advance of the Senate vote.

"Last year, the FHA got nearly 680,000 applications from home buyers. This year, it is on pace to receive 1.4 million, as exotic and adjustable-rate loans have fallen out of favor among lenders.

"The FHA, part of the Department of Housing and Urban Development, does not rely on public funds to provide mortgage insurance and covers its costs by charging a fee to home buyers, normally about 1 percent of their mortgage amount. The Senate bill would raise the ceiling on that fee to 3 percent. FHA officials said the higher fee would allow them to charge more to less-credit-worthy borrowers."

Like the Paulson Plan, like the FHA Secure refinance-bailout program, and other "fixes" that will undoubtedly be proposed in coming months, FHA reform is another attempt to ease the pain of the credit contraction/housing slump. While I understand why it's happening (namely, political pressure to "do something" about the mortgage mess), I don't understand the logic behind making the FHA loan program easier. Do we really want the FHA to go down the same sorry road that private lenders did (namely, making it too easy to buy a house with barely any money down and too-weak credit)? I mean, that's why delinquencies and foreclosures are surging in the first place.

UPDATE: FHA reform bill passed 93-1 in the Senate. The Senate and House bills will have to be reconciled, and then the president will likely sign the final product.


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