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Dow Jones Newswires via Wall Street Journal: US House Passes Bill To Shore Up FHA Finances

June 11, 2010

By Jessica Holzer

A measure to put the Federal Housing Administration on firmer financial footing sailed through the U.S. House of Representatives Thursday.

The legislation, approved on a 406-4 vote, would allow the FHA to shift some of the upfront costs it charges borrowers to the annual premium and give the agency more powers to protect itself from fraudulent or poorly underwritten loans.

Backers said the bill would help the FHA rebuild its reserves without harming the agency's mission of backing low-down-payment loans for middle-income and poor borrowers.

No lawmaker has introduced companion legislation in the Senate yet.

"The changes that we are implementing coupled with this bill will ensure that FHA can continue to serve as a bridge to economic recovery and that mortgage financing remains available until private capital returns," Department of Housing and Urban Development Secretary Shaun Donovan said in a statement.

Rep. Maxine Waters (D., Calif.), the bill's author, said in a statement that "FHA has already taken steps to increase its lender enforcement activities, and this bill empowers the agency to root out the bad actors while reserving the program for the lenders that follow the rules."

Mortgage defaults have eaten through the FHA's capital reserves as the agency has swelled to prop up the mortgage market in the wake of the housing bust. The losses have fanned fears the Depression-era agency will require a taxpayer bailout for the first time.

Last fall, the FHA reported its reserves had fallen to $3.6 billion as of Sept. 30, or just 0.53% of the $685 billion of FHA loans in force at that time.

The House-passed legislation would allow the FHA to nearly triple the cap on the annual premiums it charges borrowers to 1.50% from 0.55%. It would also beef up the agency's powers to weed out lenders that are costing the agency too much in claims and make it easier for the FHA to shield its insurance fund from losses on loans that were underwritten fraudulently or that violated FHA standards.

The FHA estimates the proposed changes will generate about $300 million a month in additional positive receipts, while costing the average FHA borrower $42 extra in monthly premiums.

Republicans, who contend the FHA is overstretched, attempted to scale back the agency.

The House defeated an amendment offered by Rep. Scott Garrett (R., N.J.) that would have raised the FHA's minimum down payment to 5% from 3.5%. It also rejected another Republican amendment to roll back by 2012 the FHA's market share to 10% of all newly originated mortgages.

An amendment to repeal the FHA's temporary authority to insure loans as large as $720,000 in certain costly markets also failed.

However, Republicans successfully inserted language, offered by Rep. Chris Lee (R., N.Y.) that would push the HUD secretary to rein in so-called strategic defaults on FHA loans.

The amendment requires the HUD secretary to define "strategic default" and work with lenders to block borrowers from defaulting when they can still afford their mortgages. The amendment also requires HUD to use all its powers to ensure the FHA is sufficiently capitalized.

The House accepted an amendment to boost the availability of affordable rental housing in costly markets by increasing the FHA limits on loans for apartment construction and renovation.

The FHA doesn't lend directly; it insures mortgages for borrowers that meet its standards. FHA loans require borrowers to pay a 3.5% down payment and monthly and annual premiums.

The agency has played an outsized role after private firms fled the secondary mortgage market during the housing bust. It currently backs about a third of all new home-purchase mortgages.

Issues:Housing