Bush Administration Steps In

by Amy Lillard

This year has been a year of ups and downs for the housing market. In our continuing series, we chronicle news affecting the housing market and its major players.

Federal Housing Administration reform could soon be a reality, as President Bush endorsed key elements of a reform package last week.

Bush promised in a speech on Friday to help subprime borrowers refinance into new loans, alleviating the pain of loan defaults and foreclosures. His plan involves relaxing aspects of the FHA's loan insurance for high-risk homebuyers, lowering the required down payment for FHA loans, and raising the limit on mortgages that would be eligible.

These provisions were part of a reform plan that was making its way through Congress last year before getting blocked in the Senate. Throughout this year, the Housing and Urban Development federal department has been pushing FHA reform to legislators, and they are due to vote now that the summer break is complete.

Analysts predict that the combination of the U.S. mortgage market crisis, which deepens in urgency and depth each day, with Bush's endorsement means FHA reform will pass soon.

Under existing rules, loans that exceed $362,000 are not FHA eligible. This has effectively eliminated the program along the East and West Coasts where house prices are higher. The program also required borrowers to make a substantial down payment. Up until now, many borrowers who normally would have sought an FHA loan have been turning to subprime lenders, who offered more flexible terms, 100% financing and quicker turnaround. The FHA share of new mortgages slipped from 9.1 percent to just 1.8 percent between 1996 and the end of 2006, according to Inside Mortgage Finance.

The proposed reform would lower the down-payment requirements and raise the limit on the size of loans that FHA can insure, from $362,000 in states with high home prices to $417,000. The FHA program aims to help some subprime or high-risk borrowers faced with increasing intersest rates on adjustable-rate mortgages. By insuring loans, FHA makes its mortgages more affordable for borrowers and less risky for lenders.

Bush was careful to point out that the reform should not bail out speculators, lenders who made bad loans or those who purchased homes without the ability to pay for them. Assuming borrowers can meet the loan limit, there are then five criteria for FHASecure eligibility:

1.    A history of on-time mortgage payments before the borrower's ARM teaser        rates expired and loans reset;

2.    Interest rates must have or will reset between June 2005 and December        2009;

3.    Three percent cash or equity in the home;

4.    A sustained history of employment; and

5.    Sufficient income to make the mortgage payment.

The Federal Housing Administration was created during the 1930s Depression to help borrowers win favorable loan terms, guaranteeing mortgage payments to lenders. The FHA caters especially to first-time home buyers, minorities and low to moderate income families.