Legislation that would expand the Federal Housing Administration (FHA) ability to serve the single-family market currently is being considered in Congress, just in time to help stem the subprime mortgage crisis.
The FHA’s $363,000 loan limit for single-family mortgages is far below the reality on the ground, with the average home in such high-cost areas as the San Francisco Bay Area going for more than $600,000. The Expanding American Homeownership Act of 2007 would allow the FHA to raise the limit to $417,000 in high-cost areas, and increase it to 100 percent of the median sales price of other areas, up from 95 percent under the current statute.
The legislation would lower downpayment requirements on FHA loans down to zero from the current 3 percent. The bill also would allow the FHA to underwrite single-family loans using a risk-based pricing approach, under which it could vary insurance premiums based on the credit risks posed by a borrower. Risk-based pricing is a common practice in the mortgage industry.
The subprime mortgage industry flourished as the FHA’s presence diminished. The FHA’s share of the single-family market fell from 19 percent in 1996 to less than 6 percent in 2005, according to the Government Accountability Office. Subprime loans made up 20 percent of the market by the end of that time span, according to the National Association of Home Builders.
Beyond pending legislation, the FHA is helping troubled borrowers in other ways as it works to ensure that a rising default rate doesn’t translate to a rise in foreclosures. The FHA’s loss mitigation program helps borrowers avoid foreclosure and retain their homes by allowing loan terms to be modified, and it’s growing more popular every day.
Even as the FHA’s rate of serious delinquencies, those in which a mortgage payment is 90 days or more past due, has continued to increase since 2003, the number of foreclosures has decreased substantially. The agency has been steadily increasing the amount of delinquent loans it has saved from foreclosure. From October 2006 to May 2007, 64 percent of 92,969 troubled borrowers used the loss mitigation program to help avoid foreclosure. In 2003, that workout ratio was only 49.7 percent. In fact, the workout ratio has risen steadily for the past few years, from 54 percent in 2004 to 60 percent last year.
Were the FHA more active in the single-family market over the last five years, it could have helped prevent the subprime crisis by offering a more transparent product, industry watchers believe. “They could have provided a much safer product that would’ve been a viable alternative to the subprime market,” said Jeffrey Lubell, executive director of the Center for Housing Policy, a sister organization to the National Housing Conference.
To allow the agency to play that role in the future, bills like the Expanding American Homeownership Act of 2007 should be a priority. “The great issue hampering FHA is their inability to keep up with the market effectively,” Lubell said. “Every time they want to come out with a new variation of one of their programs, they need to go to Congress. We need legislation that would give the FHA more flexibility.”
At press time, the legislation had been passed by the House Committee on Financial Services and was awaiting further action. The bill has broad industry support, including votes of confidence from the Mortgage Bankers Association and National Multi Housing Council. The MBA expects it to be voted on by the full House in early September.