On Tuesday, April 27, 2010, the House Financial Services Committee approved legislation that the lawmakers say will keep the FHA viable and enable it to continue insuring mortgage loans. The FHA’s continued viability came into question after rising defaults caused the federal agency’s reserves to fall below 2 percent, the minimum amount required by law.
However, the new legislation will enable the FHA to adjust premium structures for new borrowers and raise the maximum annual premiums it can charge and raise annual fees assessed. The agency can now shift some of these fees over to annual costs of the loan, enabling the borrower to pay the fees over the life of the loan. The FHA now can also terminate lenders’ approval to originate or underwrite loans backed by FHA insurance if the FHA finds evidence of fraud or noncompliance, and the organization must improve transparency and internal reporting systems.
The bill also created a new post: the Deputy Assistant Secretary at FHA for risk management and regulatory affairs. The committee did not approve a proposed amendment to raise the minimum down payment for FHA-backed loans from 3.5 percent to 5 percent.
Clearly, something must be done if the FHA is going to continue to exist in its present form, and most analysts agree that losing the FHA on top of the Fannie Mae and Freddie Mac furor could be an incredible disaster. However, it seems to me that basically what this bill does is the following:
- Let FHA charge more fees, but spread them out over the life of loans – good, in that maybe this will help FHA get back on track, but bad because they’re spreading out fees over the lives of loans that they can’t be sure in the present economic climate will get paid. If people had been paying their loans, the FHA wouldn’t have the problem in the first place. Wouldn’t it be better to get a little more up front?
- Let FHA “punish” lenders who are guilty of fraud – good, except that as real estate investors we all know what a slippery slope defining “fraud” is getting to be
- Made the FHA promise to change things that created the problem in the first place – good, if it happens. As you may suspect, I’m waiting on this one.
- Created a new position – possibly good, but only if the new Deputy Assistant Secretary at FHA for Risk Management and Regulatory Affairs is effective at handling risk management and regulatory affairs.
- Kept the current minimum down payment low – good, if you have people who need that low down payment to purchase the house, but bad if they need that low down payment because they cannot afford the house in the first place. Hopefully this will help get new, viable homeowners in homes – good for investors – without bringing back many of the problems that came with making home loans too easy to get – which gets blamed on investors!
As real estate investors, we are going to have to start regulating ourselves very carefully as the government works to get as many people who lost homes back into them as quickly as possible. While this is, in a lot of ways, a reasonable thing for the government to want to do – after all, if you put people who lost their houses back in them, how do you think they’re going to vote? – it is our role and responsibility in the housing market to govern ourselves and our investments in a way that keeps the market whole and healthy in the long term. Because, unfortunately, I don’t think anyone else is going to help us keep the system on an even keel because there are too many vested and divergent interests at stake.
Thank you for reading the Bryan Ellis Real Estate Letter – your comments are welcomed and encouraged in the space below!
Brian – investors should start regulating themselves? Really? If an entire mortgage industry couldn’t do it, do you really think investors can?
If reforms are needed to keep FHA as a viable financing option for homebuyers, then so be it. The fact is, there is no where else a low down payment buyer can go today. Even at 10%, pmi companies want a 700 credit score… unless its FHA.
And FHA MUST continue to allow 3.5% down payments. Any difficulty they are having these days are from only 2 things – depreciating real estate values and unemployment. Unfortunately, values won’t begin to stabilize until lenders begin loosening their standards and unemployment slows down.
will you address the due on sale clause, i believe it was stuck in the mortgage contract by greedy and paranoid bankers unilaterally.originally it was not in contract prior to ,is it 78/88.it creates an hardship on home owners who clearly wants to get out from a situation thy no longer can afford and easily transfer title to some one who is in a better financial position without the loan being called.the fact that the first mortgage owner is still accountable to the bank,it should be the responsibility of the home owner to submit certified documents from the new transferee to support his decision to do the transaction and now require both participants as accountable to the bank, i believe this would eliminate some of these foreclosure ,thus saving all concerned a lot of money.
Thank you for the update, I have linked to it from my blog. It is actually good news to investors like me that operate in the bread and butter area of the residential market. I am not clear though if the power of FHA to act on lenders will also influence the behavior of appraisers producing even more crazy values than today.
I disagree with the maximum annual premiums it can charge and raise annual fees assessed at this present moment, in that the economy still struggling and raising the bar for new homeowners will not solve FHA financial situation. Where they need to make adjustments is on the structure with their lender. Make sure that lenders adhere to proper processing and approval of new loans. That’s where they can reduce the losses instead of finding ways to increase fees and premiums.