Lower-income home buyers will have to jump a little higher to clear the financing hurdle if they plan to use a popular government-backed mortgage program.
Borrowers using the federally insured Federal Housing Administration loan program will soon face higher upfront costs, under a recently reached agreement. The plan also includes a new insurance premium structure that places the highest fees on those with the lowest down payments.
Leaders of the Mortgage Bankers Association of America, which held its annual convention with more than 5,000 members in Chicago last week, were quick to criticize the plan.
”If the FHA is reformed as it stands, it will be very damaging to the housing industry in America. For all intents and purposes, the government would be pulling out of the mortgage market,” said Angelo Mozilo, president- elect of the mortgage bankers, who make 80 percent of all FHA loans.
Other housing groups followed suit.
Norman D. Flynn, president of the National Association of Realtors, in a letter to Sen. Alan Cranston (D-Calif.) expressing ”deep disappointment” at the turn of events, vowed that his organization`s members will ”do everything in our power to see these misdirected and counterproductive changes modified in the next Congress.”
Earlier this summer, Congress began looking for ways to bring in more insurance premium income and reduce the risk of borrower default when a new report showed the FHA fund in a fiscally precarious position. The fund lost $4.2 billion in 1988 and, if the trend continued, would become insolvent within 10 years, according to an actuarial study released in June.
The proposed new rules are the result of negotiations within a House-Senate conference committee to reconcile two different FHA reform plans included in housing legislation passed separately by the House and Senate this summer. The compromise now goes before the full House and Senate for final approval.
The action on the popular FHA loan program is reflective of Congress`
mood in the wake of the savings and loan crisis and the subsequent federal bailout, a multibillion-dollar, taxpayer-funded enterprise that has cast a shadow over all real estate lending.
”The momentum is behind more and more restrictions on any credit or credit guarantee program,” said Jonathan Miller, legislative assistant to Rep. John LaFalce (D-N.Y.), a member of the House Banking Committee.
”All you have to say is that something faces a repeat of the S&L mess and the words work magic over Congress even when the facts don`t match them,” he said.
The FHA program, which last year accounted for roughly one in seven mortgage originations nationwide, insures mortgages of up to $124,850 for single-family homes and condominiums.
Many home buyers prefer it to privately insured mortgage programs, which guarantee a portion of the lender`s risk on conventional loans with down payments of less than 20 percent, because FHA borrower-approval standards are more lenient and the down payment requirements are not as high.
The changes in FHA come as interest rates on conventional mortgages have already risen about one-half a percentage point in the wake of Iraq`s August invasion of Kuwait. Mortgage rates are above 10 1/4 percent on a national average and are predicted to climb higher this year.
That spells trouble for the FHA program and mortgage bankers.
In times of rising interest rates, consumers have shown they prefer adjustable-rate mortgages to fixed-rate loans, and the 30-year, fixed-rate loan is the mainstay of the FHA program. Some housing economists are already predicting that ARMs will account for 40 percent or more of loan originations the rest of the year.
If the advantage of having to put down less cash with an FHA loan is also curtailed, a conventional ARM will become even more attractive to most consumers. That prospect strikes especially hard at mortgage bankers, who tend to do more fixed-rate lending and 27 percent of whose business is made up of FHA lending.
Currently, FHA borrowers can roll the full amount of their closing costs into the loan amount. Under the compromise, though, borrowers will have to pay 43 percent of those costs in cash.
That cash requirement alone will freeze some 100,000 to 150,000 potential home buyers out of the FHA program, predicted Ronnie J. Wynn, president of the Mortgage Bankers Association. The Realtors association estimates that the changes will push the FHA program out of the reach of 60,000 home buyers a year.
Under the compromise plan, for example, a borrower would need to save an additional $967 in cash, bringing total out-of-pocket costs to $2,250, to finance a $75,000 home.
The proposed FHA revamping also drops the upfront insurance premium to 2.25 percent of the loan amount from 3.8 percent, when the changes are fully phased in after five years. However, it saddles borrowers with annual renewal premiums they do not currently have to pay.
The new scheme also hits hardest at borrowers making a down payment of 5 percent or less. Those borrowers will have to pay an annual renewal premium of 0.55 percent for the entire life of a 30-year loan.
By contrast, a borrower making a down payment of between 5 and 10 percent will pay a slightly lower renewal fee of 0.5 percent a year.
Home buyers with 10 percent or more to put down will pay the half-percentage-point renewal, but only for a period of 11 years.
”It is a sad day,” Wynn said, ”when those who most need the program are being asked to pay the highest fees.”
The imposition of an annual premium even for buyers making higher down payments also will make the FHA loan program more expensive than privately insured mortgages, Wynn said.
Consequently, he predicted, the FHA will lose much of the borrower business that poses the least risk of default. Income from those loans, he added, has historically offset much of the FHA insurance fund`s losses.
”There is a great deal of fear that what you will have is an FHA program designed for the riskiest borrowers who are on the underwriting borders with little cash or a program for areas where private mortgage insurers are not so active,” said Sharon Canavan, a legislative staff member for the mortgage bankers.
”It will be a very non-competitive FHA product and it will result in even more losses for the FHA,” she predicted.
Consumers Union spokeswoman Michelle Meier called the FHA agreement a
”bitter pill to swallow” that ”creates new obstacles to home ownership that are simply unnecessary.”
Most observers, including legislative assistant Miller, believe Congress will indeed pass the housing bill before adjourning this month. The compromise also apparently satisfies the Bush administration, which in recent weeks had threatened to veto the housing bill over the outcome of the FHA issue.
Days earlier, however, the housing legislation was mired down, as various factions of Congress and the Bush administration dueled over the fate of the FHA program.
On the one side, the Senate, the administration and the Department of Housing and Urban Development teamed up in June to push through a plan that increased the costs of the default insurance for those most at risk but presumably least able to afford a home. That version also would have reduced the amount of closing costs a borrower could finance to roughly one-third of the total.
The House, however, ignored the administration`s wishes when it approved an alternative plan in July. The House version called for all FHA borrowers to share in the rescue, by assessing a renewal premium over the life of the loan, regardless of down payment amount.
The House plan, backed by several housing trade and consumer groups, also proposed to let borrowers continue financing all of their closing costs. Resolution of the FHA question also helped clear the way for the congressional negotiators to also find common ground for the more comprehensive housing legislation in which the FHA provision is contained.
The larger housing bill also covers such matters as a new low-income housing construction program and preservation of existing subsidized housing from the threat of mortgage prepayments by private owners.
