Plans for FHA to Assume Greater Role Move Forward

The Federal Housing Administration (FHA) is a step closer to taking on some $300 billion in new mortgages as the House of Representatives signed off on a borrower assistance plan in hopes of supplying over 500,000 distressed homeowners with less costly government FHA insured mortgages.  Homeowners now thought to be at too high a risk to qualify for a loan through channels currently available could refinance their mortgage into an FHA-backed loan under certain conditions.  Primarily a borrower must show they can afford to make re-payment on the new FHA refinanced loan and secondly the current lender must agree to take a hit by providing a principal reduction to the borrower’s existing mortgage balance.  Additionally borrowers who refinance under the FHA terms must agree to share 50% their equity if they are able to refinance or sell their home profitably in the future.  The proposed plan is expected to cost close to $3 billion over the course of five years and is at the forefront of a larger plan proposed by House Financial Services Committee Chairman Barney Frank along with others.

The mounting problems of the housing crisis are caught up in election year politics where the window of opportunity to pass legislation may be curtailed by the upcoming Presidential and Congressional elections in November.  Therefore the window of opportunity to accomplish something meaningful may be slipping away and both the House and Senate are eager to get something done which both parties can agree on and the White House can sign off on in the backdrop of election year politics.  Additional cross-party measures which may be included in the bill are:

• Enhanced regulation of the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.

• Making the recent increases to the conforming loan limit a permanent rather than a temporary measure.

• Re-vamping the Federal Housing Administration (FHA) by possibly adding risk premiums to loans where greater credit risk exists.   

• Providing a so-called “safe harbor” from litigation to shield lenders who agree to modify the mortgage terms of distressed homeowners unable to make their loan payments.   

• Offering first time buyer tax credits in the amount of $7,500 which are to be re-paid over a 15 year period.

• Permitting state and local housing authorities to use tax-exempt bonds to create financing projects which assist first-time, sub-prime and low income borrowers.  

• Providing federal funding for counseling services for distressed homeowners.

• Providing federal funding for individual states to use to purchase and rehab foreclosed properties.

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