News: FHA Reform Bill Could Help Distressed Subprime Borrowers

The prospects for Federal Housing Administration reform legislation brightened last week when a key senator expressed interest in passing a bill before Congress adjourns for its August recess. Senate Banking Committee chairman Chris Dodd, D-Conn., told reporters last week that he would try to get a FHA reform bill done in the "next month or so." Sen. Dodd revealed his intentions only a few days after housing secretary Alphonso Jackson said FHA could help "hundreds of thousands" of distressed subprime borrowers if Congress passes an FHA reform bill this summer. The Department of Housing and Urban Development secretary noted that 80% of subprime loans are sound. But the other 20% are "headed for trouble" and the borrowers will have difficulty making their payments once the loans reset, he said in a speech at the National Press Club last week. "We need this reform now. President Bush and I have repeatedly urged Congress to act," the HUD secretary said. Congress has been looking for ways to address rising delinquencies and foreclosures on subprime loans and FHA reform would give many distressed borrowers an option to refinance into safer and more affordable government-insured mortgages. HUD has already seen a surge in business from homeowners with conventional loans refinancing into FHA products. The agency suspects a majority of these borrowers are escaping high-cost subprime loans. FHA refinanced 60,400 conventional loans in fiscal year 2006, up 80% from FY 2005 and this trend is accelerating. During the first seven months of FY 2007, FHA refinancings of conventional loans jumped 84% compared to the same period in the last fiscal year. As of April 30, the FHA had refinanced 51,349 conventional loans. "In today's mortgage environment, it is safe to say that a significant portion, we conservatively estimated 60%, are subprime loans," FHA commissioner Brian Montgomery told a mortgage conference recently. HUD officials maintain they could help more subprime borrowers if Congress passes a reform bill that allows the FHA to charge risk-based premiums and raises FHA loan limits. The House Financial Services Committee has approved a FHA reform bill and FHA supporters were hoping committee chairman Barney Frank, D-Mass., could bring the bill (H.R. 1852) to the House floor for a vote this month. But an impasse over origination fees on FHA-insured reverse mortgage loans (which are called Home Equity Conversion Mortgages) has bottled up the bill. And it looks like the dispute between AARP and lenders will postpone House passage until July. The impasse is over an amendment attached to H.R. 1852 that reduces the origination fee on HECMs. AARP claims origination fees are too high and supports the amendment. Lenders argue it would no longer be profitable for lenders to make HECMs unless there is a change. "HECM fees have nearly tripled in the past five years," said AARP legislative counsel David Certner, and the high fees inhibit seniors from getting reverse mortgages. "We are looking for a way to reduce the fees," he said. Industry officials are concerned lenders would shift to conventional reverse mortgages if the origination fee is cut, which would result in a drop in HECM originations. That has revenue implications that could place the FHA reform bill in jeopardy of running afoul of congressional budget rules. Every bill has to be revenue neutral or increase revenue under the "pay-go" rules. The FHA reform bill depends on an increase in HECM originations to generate significant revenue to meet the pay-go test. Talks between AARP and mortgage industry groups have been ongoing for months and it has been frustrating, according to one source. "I think we are making progress," Mr. Certner said. "We would like to reach an agreement that is mutually satisfactory."

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