Bipartisan legislation unveils measures to reform FHA

The latest trend developing amongst policymakers is the creation of proposals to reconstruct the mortgage finance system.

The leaders of the Senate Banking Committee have jumped on the bandwagon and introduced legislation aimed at reforming the Federal Housing Finance Administration with a goal to ensure stability in the mortgage market and protect taxpayers.

Senate Banking Committee Chair Tim Johnson, D-S.D., and ranking member Mike Crapo, R-ID, are leading the proposed bill, which will give the FHA tools to improve its financial condition, including strengthened underwriting standards, improved lender accountability measures and reforms to the agency’s reverse mortgage program.

“The Federal Housing Administration plays a key role in our nation’s housing market, and I am pleased that Ranking Member Crapo and I have been able to work together on this bipartisan legislation,” Johnson said. 

He added, “Our bill will give the FHA the tools it needs to get back on stable footing and strengthen a program important to many Americans, and I look forward to working with the rest of the committee to move this legislation forward.”

The bill would implement a number of changes to the FHA’s authority including, the establishment of a minimum mortgage insurance premium of 55 basis points.

Additionally, the legislation would increase the current ceiling of mortgage insurance premiums from 155 basis points to 205 basis points.

The bill also would expand the FHA’s indemnification authority to its direct endorsement program and also the authority to terminate a mortgagee’s approval on a national basis rather than the current limitation to only geographic areas.

Furthermore, the proposal mandates that the Secretary of Housing and Urban Development “evaluate and revise as necessary FHA’s underwriting standards” through the use of metrics such as back-end debt-to-income. 

The proposal also gives the FHA authority to govern the Home Equity Conversion Mortgage (HECM) program through mortgagee letters and a mandate that the FHA Mutual Mortgage Insurance (MMI) Fund’s capital reserve ratio reach 3% within 10% years as opposed to its current target of 2%. 

“Chairman Johnson and I have crafted a bill that includes bipartisan, effective reforms that put FHA on a path toward improving its unsustainable financial condition,” Crapo explained. 

He continued, “Many of these reforms include priorities from our colleagues on the Committee, and I am eager to work with them to return the FHA to a strong, self-sustaining insurance program that can remain a viable option for future homeowners.”

However, market experts are not convinced that this particular FHA solvency bill is the solution to housing reform.

Regarding the prospects for FHA legislation passing Congress, the outlook is negative, analysts claim.

“FHA reform plays an integral role within the House GOP legislation and there is no indication that members of the House Financial Services Committee are willing to address the FHA on a standalone basis,” said Compass Point analyst Isaac Boltansky.

He added, “To this end, we believe that House Republican leadership allowed the HECM fix (H.R. 2167) to pass in June since they were prepared to refuse considering broader FHA reform on a standalone basis.”

Going forward, FHA reform will more than likely be met with a warm reception in the Senate, but a clear path to passage for legislation in the House does not seem plausible at this point given the other issues impacting Capitol Hill, such as the sequester.

“At most, we can see the targeted HECM fix becoming law given its noncontroversial nature,” Compass Point concluded.

3d rendering of a row of luxury townhouses along a street

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