Overview of Current Reforms and Reform Legislation

What’s the big deal with FHA loans? Currently the FHA program has no declining value adjustments at the government level, has low down payment and loan to values as high as 97%, cash out refinances allowed to 85%, rate and tern refinances to 97%, total down payment can be a gift, no credit score requirements, no income limits or sales price restrictions, FHA loans are assumable, seller concessions may be as high as 6%, no cash reserves required, non-occupying borrowers are allowed with blended ratios (SFR only), non taxable income (including child support) may be grossed up, and bankruptcies allowed after 2 years. We’ll see if investors continue allowing all of these with $729 loan amounts, of if they add “overlays” to restrict underwriting.

Reform Legislation

The Expanding American Homeownership Act, H.R. 1852, known as FHA Reform or FHA Modernization, was approved by the U.S. House Financial Services Committee on May 3, 2007. The bill now awaits a vote by the full House of Representatives and by the Senate. It will enable the FHA to reach more prospective borrowers and allow millions more low- and moderate-income families to achieve the American dream of homeownership.

Some of the highlights of the legislation include:

• FHA mortgage limits:
• Increase the limit for lower cost areas from 48% to 65% of the government sponsored enterprises (GSE) conforming loan limit, permitting the FHA to insure more newly constructed homes.
• Increase the limit for higher cost areas from 87% to 100% of the conforming limit with individual local limits set at the median price of a home in each area.
• Because of its current mortgage limits, FHA is not a viable option for borrowers in high cost housing markets.
• Down payment:
• Eliminates the FHA's 3% minimum cash investment requirement and down payment calculation.
• Provides 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.
• Loan term:
• 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.
• Mortgage insurance premium:
• Eliminates the 2.25% upfront and .55% 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% to 8% above market. For example, a 3% FHA upfront premium for a $100,000 mortgage is $19 per month. A 3% interest rate increase (6.5% to 9.5%) for the same mortgage is $156 per month. The difference of $137 would allow the use of $21,700 more towards the purchase of a house. The annual FHA premium charge is eliminated after 5 years and 22% property equity.
• Condominiums:
• 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.
• Reverse mortgages:
• Eliminates the FHA cap on the number of loans that can be insured.
• Sets a national loan limit at the GSE conforming rate so that all seniors have equal access to their equity regardless of where they live.
• Permit seniors to purchase a home and get a HECM in one transaction, so that seniors can easily move to more suitable housing. Currently borrowers must complete their home purchase transaction and HECM separately, incurring additional costs.

Current internal reforms include

• Simplified appraisal: The FHA has eliminated paperwork and has made its appraisal more similar to conventional appraisals. (ML 2005-34)
• Streamlined FHA appraiser approval: The FHA has streamlined its appraiser examination and appraiser roster renewal procedures (ML 2006-26)
• Closing costs: The FHA has simplified closing costs and accepts customary conventional fees and reasonable costs deemed necessary to close a mortgage. (ML 2006-04 and 07)
• Repair requirements: The FHA has eliminated many repair requirements and forms. (ML 2005-48)
• Streamlined rehabilitation 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. (ML 2005-19 and 50)
• New construction: The FHA has greatly reduced documentation requirements for lenders. (ML 2006-33)
• Lender insurance: By allowing high performing lenders to electronically endorse FHA mortgages, the FHA has made the processing of FHA loans easier and more cost-efficient. (ML 2005-36)
• FHA resource center: The FHA has created a technical support center for industry partners. By using this approach lenders obtain clear and consistent technical guidance nationwide. (ML 2006-08)
• Reverse mortgages (HECM): In order to streamline and improve processing, the FHA has made significant changes to the reverse mortgage program. Some of these changes include:
• Elimination of some documentation (ML 2006-23)
• Improved counseling (ML 2006-25)
• Extension of principal limit rate lock (ML 2006-22)
• Clarification on how to handle judgments and liens (ML 2006-20)
• Line of credit payment option for Texas (ML 2006-06)
• Expansion of the national HECM counseling network (ML 2005-4