By Eugene T. Lowe
September 24, 2007

The U.S. House of Representatives took a major step in addressing the mortgage foreclosure problem in passing H.R. 1852, the “Expanding American Homeownership Act of 2007.” The legislation modernizes the Federal Housing Administration (FHA), a federally insured loan program. The House Financial Services Committee’s press release said that the legislation “will enable FHA to serve more subprime borrowers at affordable rates and terms, recapture borrowers that have turned to predatory loans in recent years, and offer refinancing loan opportunities to borrowers struggling to meet their mortgage payments in the midst of the current turbulent mortgage markets.”

The U.S. Conference of Mayors adopted policy at the 75th Annual Meeting which called on Congress to pass legislation that would reform the FHA. President George Bush also called for FHA reform at an August 31st press conference: “I’ve made this a top priority to help our homeowners navigate these financial challenges, so that as many families as possible can stay in their homes…”

The bill includes the following important provisions (as reported by the Financial Services Committee):

• Lower Down Payments. Authorizes zero and lower down payment loans for borrowers that can afford mortgage payments, but lack the cash for a required down payment.

• Housing Counseling. Authorizes more than double the current funding level for housing counseling, to help subprime homebuyers and borrowers late on mortgage loan payments.

• Subprime borrowers. Directs FHA to provide mortgage loans to higher risk (but qualified) borrowers, without authorizing unnecessary fee hikes on such borrowers.

• Reverse Mortgages. Enhances the FHA reverse mortgage loan program to help seniors pay for health and other expenses, by removing the loan cap to avoid program shutdowns, raising loan limits, and by reducing the maximum fee lenders can charge for these loans.

• Multifamily Loans. Raises FHA multifamily loan limits, so these loans can fully fund construction costs in high cost areas, and enhances sale of foreclosed FHA rental housing loans to localities, so that affordable housing can be maintained in local communities.

• Affordable Housing Fund. Authorizes up to $300 million a year from the bill’s excess profits for affordable housing, instead or returning such funds to the General Treasury.

• Higher Loan Limits. The bill would raise FHA single family loan limits, which now bar loans above 95% of the median home price in each local area and shut FHA out of higher cost home markets. FHA loan limits are raised in each area to the lower of (a) 125% of the local area median home price or (b) 175% of the national GSE conforming loan limit. The bill also retains a nationwide FHA loan floor of 65% of the GSE conforming loan limit, and gives HUD authority to raise these loan limit amounts by up to $100,000 “if market conditions warrant.”

• The bill also directs FHA to make available refinancing loans to existing qualified homeowners who are in default or at risk of default due to rate resets or mortgage market conditions, and to authorize lower down payments for such purpose. The bill also includes provisions to address problems arising from inflated appraisals.