FHA Reform Gains Momentum — Again

Long an item on the industry’s agenda, efforts to modernize the U.S. Department of Housing and Urban Development’s Federal Housing Administration are again gaining momentum as the subprime borrower crisis brings federal housing programs to the forefront as a possible solution. Officials at HUD yesterday called again for the Senate to take up an FHA proposal that swept through the U.S. House of Representatives last year by a 415-7 vote, saying that statutory FHA reform was necessary to fill a void in the subprime lending market. Adding to the chorus, the National Association of Realtors also yesterday sent a letter to HUD Secretary Alphonso Jackson, urging action by HUD to change FHA rules and waive the requirement that a homeowner’s mortgage be “current” in order to refinance into an FHA loan product. Created in 1934 to stimulate the housing market during the depression, the FHA has helped more than 34 million first-time, minority, and low-income families who do not qualify on their own for prime mortgages to become homeowners. But as lending practices have evolved and modernized, many — including HUD officials — say that the FHA has not had the ability, without Congressional legislation, to adapt to the new marketplace and become a viable alternative to subprime loan products. “Too many families have been lured into accepting high-cost, exotic loans to purchase their homes because the market doesn’t provide enough choices that are safe, fair and affordable. Modernizing the FHA would provide more hard working families with a strong alternative to risky mortgages,” said HUD Secretary Alphonso Jackson. HUD officials said in a press statement that FHA Commissioner Brian D. Montgomery has made what they believe to be much-needed updates to FHA’s policies and procedures that did not require legislation, but said it now believes that statutory reform must be enacted for the FHA mortgage insurance program to fully adapt to today’s marketplace.

“Many homeowners who were able to make timely payments under the original terms of their loan are finding it difficult to make payments after rate adjustments,” said NAR president Pat Vredevoogd Combs. “We believe FHA can design a mechanism where credit worthy borrowers could refinance subject to prudent guidelines, and therefore avoid losing their homes.” While many see the FHA as a potential safety net for troubled borrowers — and for lenders, who stand to lose billions in the aggregate due to associated defaults — some say FHA reform won’t be the cure-all many are suggesting it could be. “FHA reform will certainly help a subprime borrower that could otherwise qualify for a loan under program guidelines,” said one source, on condition of anonymity. “But looking at the subprime market, how many borrowers is this, really? “The problem in my eyes is that we have a collection of borrowers in the subprime market segement who simply cannot afford their mortgage loan and shouldn’t have been given that loan to begin with. No amount of FHA reform can fix that problem.”

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