MORTGAGE$: New FHA reforms coming in 2008

By William Kugel

The U.S. Senate has recently passed the FHA Modernization Act of 2007, and President Bush could sign the new bill into law at any time. I do not know if it is fair to say that this legislation will "overhaul" the Federal Housing Administration (FHA), but its goals certainly include breathing new life into many of the FHA loan programs. FHA loans had lost market share due to becoming non-competitive with traditional conventional financing, for not keeping pace with the technological advances within the mortgage industry, and for many cumbersome and restrictive guidelines. In this article, I will provide an overview of some of the reforms that you are likely to find in FHA loans in the coming years. Here are some of the key highlights of the proposed new legislation: New higher loan limits. The new legislation increases the limits of FHA mortgage loans. Traditionally, FHA had standard loan limits, which were often lower than those of many traditional conventional and sub prime mortgage loans. In areas of the country where housing costs are relatively high, many individuals looking to purchase a home could not, as the old FHA loan limits were below the median house prices. Because of its current mortgage limits, FHA is not a viable option for borrowers in high cost housing markets. New lower down payment. FHA reform removes the mandatory 3 percent down payment, which many low-income borrowers cannot afford. This eliminates the FHA's 3 percent minimum cash investment requirement and down payment calculation, furthering reducing amounts required of first time buyers. The FHA plans to switch to a more flexible down payment option providing FHA borrowers a range of options to control the amount of their down payment and mortgage payment based on their immediate and long-term goals. New risk-based approach to mortgage insurance. The FHA modernization creates a new risk-based structure. Currently, all borrowers who apply for an FHA loan are subject to a standard premium. In the new structure, the premium would shift up or down based on that borrower's level of risk to the lender based on the credit profile of the borrower. According to FHA, this "Eliminates the 2.25 percent upfront and .55 percent annual premium caps allowing the FHA to raise or lower the premium to match the borrower's risk. The FHA borrower gets a market interest rate loan; the risk is mitigated through the premium. 'High cost loans' offset risk in the interest rate, sometimes 3 percent to 8 percent above market. For example, a 3 percent FHA upfront premium for a $100,000 mortgage is $19 per month. A 3 percent interest rate increase (6.5 percent to 9.5 percent) for the same mortgage is $156 per month. The difference of $137 would allow the use of $21,700 more toward the purchase of a house. The annual FHA premium charge is eliminated after five years and 22 percent property equity." New longer term options. The FHA "Increases the maximum loan term from 30 years to 40 years. The longer loan term will decrease monthly payments yet build homeowner equity through a fully amortized loan." Reception to this change may be cold because conventional loans already offer a 40-year option and many borrowers are cautious about extra interest in an extended term loan. New relaxed guidelines for condominiums. FHA reform revises the definition of "mortgage" to insure condominiums as a single-family unit rather than a multifamily project. The change would align the FHA to the industry and streamline processing, potentially reducing condominium costs. New twist on reverse mortgages. The new legislation permits seniors to purchase a home and get a reverse mortgage in one transaction, so that seniors can easily move to housing that is more suitable. Currently borrowers must complete their home purchase transaction and reverse mortgage separately, incurring additional costs. The new law also sets a new national loan limit so that all seniors have equal access to their equity regardless of where they live. In addition, FHA has taken steps to eliminate paperwork and offer better counseling to reverse mortgage candidates. Consumers and industry professionals alike may also be unaware that FHA has already instituted many internal reforms in its effort to "modernize" FHA loan programs. For example: Simplified appraisal requirements. The FHA has eliminated paperwork and has made its appraisal more similar to conventional appraisals. Streamlined FHA appraiser approval. The FHA has streamlined its appraiser examination and appraiser roster renewal procedures. Simplified closing costs. The FHA has simplified closing costs and accepts customary conventional fees and reasonable costs deemed necessary to close a mortgage. Reduced repair requirements. The FHA has eliminated many repair requirements and forms. More streamlined rehab mortgage. The FHA has created a streamlined version of its 203(k) Rehabilitation Mortgage that drastically reduces the amount of paperwork and shortens processing times for lenders. Easier access to new construction. The FHA has greatly reduced documentation requirements for lenders. In addition to the changes briefly summarized above, the FHA Modernization Act will also likely have a significant impact on existing homeowners. You may have thought that if you were not a first time buyer you would not be eligible for an FHA mortgage. New refinance provisions are opening up FHA loans to homeowners. Moreover, with a substantial number of homeowners stuck with onerous sub prime loans, FHA's new FHA Secure program could not have come at a better time. Additional details for existing homeowners will be available in subsequent articles. In the meantime, see a knowledgeable mortgage professional for assistance. The column MORTGAGE$ has been in continuous publication for 17 years. William Kugel is an author with over 31 years experience in the mortgage and real estate industries and a Mount Washington Valley resident. You may contact him c/o The Conway Daily Sun. All Rights Reserved. Copyright 2007, W. H. Kugel.