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Congress to Consider FHA Reform, Mortgage Insurance Hike

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House Resolution (HR) 5072, the FHA Reform Act of 2010, was reported to the House of Representatives Tuesday and could begin facing votes as early as this week. The bill, which establishes a handful of new Federal Housing Administration (FHA) regulations and authorities, is already stirring the response of mortgage finance industry players who warn pieces of the reform could harm lenders' business and make homeownership unaffordable to some. The FHA insures approved mortgage lenders against default-related losses on qualifying loans. The FHA reform bill would raise the annual mortgage insurance premium to 1.55% from 0.55%. "Raising premiums is never desirable, but if done prudently, and if coupled with decreases in the upfront premium, this step has the potential to strengthen FHA’s books while actually lowering closing costs for many borrowers," said Mortgage Bankers Association (MBA) president and CEO John Courson in a letter to the House today. In addition to strengthening the FHA's capital base, the bill aims to crack down on FHA-approved lenders. It would subject all approved lenders to indemnification provisions -- meaning the lenders would be responsible for repaying the FHA -- for claims-related losses on certain mortgages. All lenders could potentially be required to indemnify the FHA for claims-related losses on mortgages determined to have been underwritten in violation of FHA standards or in connection with fraud or misrepresentation. The bill would grant FHA the authority to terminate a lender's approval on a national basis due to the performance of regional branches. It allows FHA to use outside credit risk analysis sources to evaluate underwriting standards and analyze lender performance. It would require FHA-approved lenders to report actions taken against other FHA-approved lenders in cases of suspected fraud or misrepresentation, including among loan and servicing rights purchases. It would establish a permanent secretary-appointed position of deputy assistant secretary for risk management and regulatory affairs at FHA. "[T]he bill’s sections dealing with lender enforcement and loan indemnification address important areas, but would caution that the final legislation needs to ensure that responsible lenders are not discouraged from participating in the FHA program," MBA's Courson added in his letter to the House. The MBA also joined with the National Association of Home Builders (NAHB) and National Association of Realtors (NAR) to write a letter opposing an amendment to the bill offered by Representative Scot Garret (R-NJ). The amendment would raise the FHA's downpayment requirement, which the group warned could put homeownership out of reach for an estimated 300,000 households whose cash reserve would be depleted under the raised downpayment requirement. MBA, NAHB ad NAR also opposed an amendment by Rep Tom Price (R-GA) that would limit FHA's mortgage finance market share to 10%. "We all welcome the return of private lending and corresponding reduction in FHA’s market share, as that will indicate a return to a healthy housing market," the group wrote. "But today, FHA is appropriately serving its countercyclical role of providing credit and needed liquidity when the private market is not available to many homebuyers." The letter adds: "Legislating an arbitrary reduction in market share in the midst of a housing downturn will have a negative impact on homeownership." Write to Diana Golobay.

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