FHA Reform Bill Proposed

Democratic Representatives Maxine Waters and Barney Frank announced the introduction of the "Expanding Homeownership Act of 2007". (Hat tip: The Mortgage Cicerone) Here are some highlights from the press release.

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.

It will be interesting to see how these changes to FHA will help lessen the foreclosure problem that is rearing its ugly head in the subprime market. One of the interesting problems confronting FHA is that there are many people in this industry who have never done a FHA loan or even understand what one is. This will give consumers fewer outlets to secure FHA financing, even if it makes good sense for them to be in a FHA loan. Banks also face a problem in that many of their underwriters don’t have extensive FHA training and experience; there could be a big backup and delay in trying to get FHA loans complete. They may have a distribution problem.