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House Democrats Introduce Comprehensive FHA Reform

July 27, 2009
Press Release

Representative Maxine Waters, Chairwoman of the Subcommittee on Housing and Community Opportunity, and Barney Frank, Chairman of the Financial Services Committee today introduced H.R. 1852, the "Expanding Homeownership Act of 2007."  The bill will revitalize the Federal Home Administration (FHA), a provider of mortgage insurance to low and moderate income families seeking the American dream of homeownership. Chairwoman Waters called on her colleagues to pass this legislation quickly to return stability to the mortgage lending market.

"There is growing evidence about the perils of the subprime lending market and the rise in foreclosures, with estimates as high as 2 million mortgage loan defaults predicted by years' end," said Chairwoman Waters.  "Without a viable FHA, many low and moderate income borrowers are left with few safe and viable mortgage options."

Specifically, the bill modernizes the FHA and brings it into the realities of the housing market in the 21st century by:

*        Increasing loan limits in high cost areas of the country like California, New York, and Massachusetts, where FHA has been driven from the market, forcing many borrowers  to turn to high-cost financing and other non-traditional loan products. 

*        Authorizing zero down and lower down payment FHA loans for homebuyers who could not otherwise make the down payment required under current FHA rules, to make FHA more consistent with other private sector loan products.

*        Directing FHA to underwrite to borrowers with higher credit risk than FHA currently serves that are still creditworthy to take out a mortgage loan, but are otherwise now being driven into the subprime loan market, with much higher mortgage rates.

*        Permanently eliminating the current statutory volume cap on FHA reverse mortgage loans to permit this program to meet the growing needs of home equity-rich and cash-poor seniors citizens that need help paying bills or needed home costs.

In addition, the bill includes a number of important changes to the version of the bill that passed the House last year.  First, it eliminates the fee hikes from last year's bill for borrowers that continue to make a down payment, scaling back the maximum upfront fee from 3% to 2.25%, and the maximum annual fee from 2% to .55%.  These reductions would reduce FHA closing cost premiums for a hypothetical family buying a $300,000 home by $2,250, and annual fees over a five year period by over $20,000, compared to the bill enacted last year. 

The bill also adds a number of homebuyer protections not included in last year's bill for families taking out riskier zero down payment loans, and for borrowers who represent a higher credit risk.  Specifically, the bill gives HUD authority to require pre-purchase counseling for riskier borrowers, requires a number of disclosures spelling out the costs and risks of zero down and lower down payment loans, and provides a borrower "opt-in" to receive notice of availability of counseling in the event a borrower falls behind in their loan payments.

Finally, the bill includes a provision authorizing loan limit increases for FHA rental housing loans in high cost areas, where current FHA loan limits do not keep pace with local construction costs.