FHA needs flexibility to aid home buyers

The Federal Housing Administration was created in 1934 during the Depression to stimulate the housing market and give home buyers access to reasonably priced mortgages under fair terms.

Over the past 74 years, FHA has helped more than 34 million families become homeowners.

FHA has never interfered with the private market, while always serving its congressionally mandated purpose, which is to serve as an innovator in the mortgage market, to meet the needs of citizens otherwise underserved by the private sector, to stabilize housing markets and to support the national economy. This mission is still relevant, perhaps now more than ever.

However, FHA has been unable to adapt to the needs of today’s marketplace. Over the years, the mortgage industry has changed dramatically. Reliance on automated underwriting systems and risk-based pricing is standard operating procedure today. A multitude of innovative products has been created. Simply put, the mortgage market passed by FHA.

Without a viable FHA alternative, first-time home buyers, minority home buyers and home buyers with less-than-perfect credit were left with fewer safe and affordable options. Many turned to high-cost financing and subprime loan products to be able to afford their first homes. While low initial monthly payments seemed like a good thing, the reset rates on some interest-only loans are substantial and many families are unable to keep pace when the payments increase. In addition, prepayment penalties make refinancing cost-prohibitive. These factors poisoned the U.S. mortgage market.

As more borrowers find themselves unable to make their exceedingly high monthly mortgage payments, loan defaults are increasing, personal credit scores are falling, and many are losing their homes to foreclosure.

FHA is working to once again provide the safe alternative home financing that American families have trusted for years.

FHA has made significant changes, streamlining and realigning its operating procedures. While these changes are good and long overdue, they are not enough. The law must be amended to give FHA the flexibility it needs.

FHA modernization is designed to give home buyers who can’t qualify for prime financing a choice again. The legislation will allow FHA to fulfill its mission, just as it did in 1934, when the same kinds of circumstances existed. Back then, interest-only loans and balloon loans were prevalent, so FHA was established to give the private sector a way to provide long-term, fixed-rate financing.

The FHA reform bill would increase access to home loans by lowering down payment requirements and allowing FHA to insure bigger mortgages in high-cost areas — places like California, New York, Massachusetts and the District of Columbia, where FHA has been practically nonexistent for the better part of a decade. The need for higher loan limits in areas such as these was noted in the economic stimulus package President Bush recently signed. It temporarily raises FHA loan limits to as much as $729,750.

The FHA reform bill would also expand FHA’s authority to price the insurance fairly, with risk-based premiums. All of these changes are critically important in the effort to help subprime borrowers refinance into safe and affordable home loans, while giving new borrowers the safe FHA alternative.
Although both bodies of Congress have passed versions of these reforms, FHA isn’t out of the woods. Congress must now reconcile the differences between the two bills and produce a single, comprehensive piece of legislation for the president’s signature.

By modernizing FHA, we can help hundreds of thousands of Americans share in the dream of homeownership and prevent many more from falling victim to predatory lenders who hide important details in the fine print. The new FHA will ensure homeownership is accessible, affordable and safe.