House Passes FHA Bill

On Tuesday, the House of Representatives passed H.R. 1852, which is known as “Expanding American Homeownership Act of 2007.” House representatives said the bill would allow the Federal Housing Authority (FHA)to serve more subprime borrowers, by offering affordable rates and terms. In addition, an amendment was attached to the bill for the FHA to make available refinancing loans to existing qualified homeowners who are in default or at risk of default as a result of rate resets or tighter lending standards. The amendment authorizes lower down payments for this purpose and includes a provision to deal with problems related to inflated appraisals. The bill includes a provision for lower down payments, even to zero down for borrowers that can afford the payments, but don’t have the cash to put down on a house. Loan limits are also raised to the lower of 125% of the local area median home price or 175% of the national GSE conforming loan limit. Under current rules, loans above 95% of the median home price in each local area are barred. According to Deutsche Bank analysts, this provision more than doubles the FHA loan limit in high cost areas from %362,790 to $729,750. Loan terms are also increased to 40 years from 35. Other provisions of the bill include housing counseling designed to help subprime homebuyers and borrowers who are late on their mortgage payments; directs FHA to provide mortgage loans to qualified subprime borrowers without authorizing unnecessary fee hikes; and raises FHA multifamily loan limits. Today, the Senate Banking Committee is scheduled to mark-up a version of their bill to modernize the FHA. In mid-July, Senator Schumer introduced a bill, “FHA Loan Limit Adjustment Act of 2007,” that also would increase the loan limits on FHA loans. If passed, issuance of Ginnie Mae MBS is expected to increase substantially. According to Deutsche analysts, the Bush administration is not in favor of having the loan limits raised above $417,000, but they have not actually threatened a veto. Analysts said they would be cautious on adding to GNMA positions until a law is finalized and the impact on GNMA supply can be clarified.