The rift between HUD and Congress over modernizing the FHA deepened in recent weeks as HUD moved forward with plans to charge riskier borrowers a higher premium, starting as soon as Jan. 2, 2008.
Risk-based pricing would reward borrowers who have better credit and a larger down payment with a lower premium for a federally insured mortgage. Riskier borrowers, such as those with poor credit and less money saved for a down payment, would pay more for their FHA loan.
Last summer, the government's General Accounting Office (GAO) reported to the Senate Committee on Banking, Housing and Urban Affairs that risk-based pricing could have a significant impact on FHA borrowers. By analyzing FHA borrowers from 2005, the GAO found that under risk-based pricing, one in five of those borrowers—and one in three African-American borrowers—wouldn't have qualified for an FHA-insured loan.
“That's a big deal,” says Scott Syphax, president and CEO of the down-payment assistance group Nehemiah Corp. of America. “If they can't buy homes with FHA, what options do they have? Predatory lenders.”
Additionally, 37 percent of borrowers would have paid higher premiums, the GAO report says. Another 43 percent of borrowers would have paid the same or less than they paid under the FHA's current, flat-rate pricing.
Congress and the administration locked horns on a regular basis in 2007 on FHA modernization legislation, which passed the House and currently is under consideration in the Senate. Among other changes, the reform bill would increase loan limits and reduce down-payment requirements for borrowers.
They're important adjustments. In recent years, the FHA's low lending limits, coupled with higher housing prices and the proliferation of subprime lenders offering 100 percent financing, had put the FHA at a competitive disadvantage in serving its primary market, first-time and credit-challenged home buyers.
HUD attempted to do away with seller-funded down-payment assistance programs as part of FHA modernization, citing statistics that showed that borrowers using the programs defaulted at a significantly higher rate. Down-payment assistance groups sued, and a federal judge granted a preliminary injunction just days before HUD was scheduled to begin banning the assistance.
HUD officials also balked at a House proposal to use FHA surplus money to fund an affordable-housing trust fund, saying it put the agency's reserves at risk.
Then, in early November, House Financial Services Committee chairman Rep. Barney Frank, D-Mass., chastised FHA commissioner Brian Montgomery and HUD secretary Alphonso Jackson, accusing HUD of acting unilaterally on implementing risk-based pricing before Congress finished its work on FHA reform.
HUD has the ability to raise premiums without legislative approval, but has held off because the FHA modernization bill was moving forward, says a senior FHA official who spoke on the condition of anonymity. When it seemed less certain that the legislation would pass (a similar bill failed in the 2006 session), HUD announced it would implement risk-based premiums. Without it—and with the requirement that the FHA accept loans with seller-funded down-payment assistance—the FHA would have to raise all of its borrowers' premiums to stay in the black, the official says.
“We didn't want to sit and wait for the legislation knowing we'd have to take some steps to strengthen the insurance fund,” the official says. “Not only has our volume been flat, but for the last couple years, a lot of people who ordinarily would have gone FHA went subprime, so the people we wound up serving were the most likely to default. We had adverse selection. This is an attempt to attract better borrowers to even out the risk. … People with worse credit pay more, but those people can use FHA and get a much better deal than if they had to go to subprime.”
One thing that could stall implementation is the complexity of the new pricing formula, which factors in credit history and the amount and source of the down payment. The FHA official says that HUD is considering pushing back the start date of using risk-based pricing to give mortgage originators extra time to learn the pricing formula.
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