WSJ: FHA Reform Easily Passes House

NewImage.jpgThe US House of Representatives approved H.R. 5072, the FHA Reform Act of 2010 by a vote of 406-4 on Thursday.  The bill would nearly triple the cap on annual premiums the FHA can charge borrowers and give the agency more powers to protect itself from fraudulent or poorly-underwritten loans says the Wall Street Journal.

Backers said the bill would help the FHA rebuild its reserves without harming the agency’s mission of backing low down payment loans for middle income and poor borrowers.

The measures in the bill will reduce the risk of the FHA insurance fund “while protecting the interests of low-income home buyers,” the White House said this week in an official statement of administration policy ahead of the debate on the bill. No lawmaker has introduced companion legislation in the Senate yet.

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Mortgage defaults have eaten through the FHA’s capital reserves as the agency has swelled to prop up the mortgage market in the wake of the housing bust. The losses have fanned fears the Depression-era agency will require a taxpayer bailout for the first time.  Last fall, the FHA reported its reserves had fallen to $3.6 billion as of Sept. 30, or just 0.53% of the $685 billion of FHA loans in force at that time.

The House-passed legislation would raise the cap on the annual premiums the FHA charges borrowers to 1.50% from 0.55%. It would also beef up the agency’s powers to weed out lenders that are costing the agency too much in claims and make it easier for the FHA to shield its insurance fund from losses on loans that were underwritten fraudulently or that violated FHA standards.

The FHA pushed for the legislation, which it says will allow it to replenish its reserves faster. The agency estimates the proposed changes will generate about $300 million a month in additional positive receipts, while costing the average FHA borrower $42 extra in monthly premiums.

US House Passes Bill To Shore Up FHA Finances

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  • There is some controversy as to whether or not FHA can automatically take the ongoing HECM MIP from its current annual rate of 0.5% to 1.25% without this type of legislation. This bill will remove the controversy and will allow FHA to do just that. We need this bill to be enacted and to become effective before October 1, 2010.rnrnThe bill will provide one of the two crucial things needed to avoid crippling reductions to the principal limit factors (u201cPLFsu201d) on HECM closings occurring during the fiscal year ending September 30, 2011 on HECMs originated in that same fiscal year. Some are now estimating the positive credit subsidy at $1.7 billion on this cohort of HECMs. That is a whopping $900 million higher than the positive credit subsidy requested for about the same number of HECMs estimated to be originating and closing during the current fiscal year. Some of us familiar with elements of the budget request last year had guestimated (a combination of guessed and estimated) that the amount for this year had to be above $1.05 billion ($798 million plus $250 million) but how much more was unknown. Most of us felt it was closer to $2 billion but how much closer, we simply had no idea.rnrnEven if the bill is enacted and goes into effect before October 1, 2010, we still need $250 million in appropriations (or another source) or we will suffer further reductions in the principal limit factors in effect on September 30, 2009 beyond the 11% – 15% reductions already projected to go into place on October 1, 2010. Even though the estimate for HECMs originating and closing during the fiscal year ending September 30, 2011 is firmly believed to be greatly overestimated, the budget process does not allow for the $1.7 billion to be lowered as a result. rnrn(For clarityu2019s sake, whenever the ongoing MIP is raised, PLFs will generally have to be adjusted; the ongoing MIP is treated as additional interest in the calculation of the PLFs.)rnrnIf you are confused by all of this, you are not alone. If you read some RMD stories and related comments during May 2009 and throughout the rest of last year, you will see how few, including long time veterans and executives, really understood the $798 million positive credit subsidy request and what it represented. As stated several times before, the move of the HECM program from the General Insurance Fund category to the Mutual Mortgage Insurance Fund category has changed the significance of the HECM budget exercise which occurs each and every year. It is hoped that with improved home appreciation rates in future years, the budget projections will not be nearly as harmful to the HECM program as they are right now.rnrnOne question which remains is at what level will the lending limit be legislatively set as of January 1, 2011? Letu2019s hope it is no lower than $550,000 although it really needs to stay at $625,500. It is scheduled to return to $417,000 on that date unless Congress acts. rnrnBeing a HECM originator right now just may not be for the faint of heart.

  • There is some controversy as to whether or not FHA can automatically take the ongoing HECM MIP from its current annual rate of 0.5% to 1.25% without this type of legislation. This bill will remove the controversy and will allow FHA to do just that. We need this bill to be enacted and to become effective before October 1, 2010.

    The bill will provide one of the two crucial things needed to avoid crippling reductions to the principal limit factors (“PLFs”) on HECM closings occurring during the fiscal year ending September 30, 2011 on HECMs originated in that same fiscal year. Some are now estimating the positive credit subsidy at $1.7 billion on this cohort of HECMs. That is a whopping $900 million higher than the positive credit subsidy requested for about the same number of HECMs estimated to be originating and closing during the current fiscal year. Some of us familiar with elements of the budget request last year had guestimated (a combination of guessed and estimated) that the amount for this year had to be above $1.05 billion ($798 million plus $250 million) but how much more was unknown. Most of us felt it was closer to $2 billion but how much closer, we simply had no idea.

    Even if the bill is enacted and goes into effect before October 1, 2010, we still need $250 million in appropriations (or another source) or we will suffer further reductions in the principal limit factors in effect on September 30, 2009 beyond the 11% – 15% reductions already projected to go into place on October 1, 2010. Even though the estimate for HECMs originating and closing during the fiscal year ending September 30, 2011 is firmly believed to be greatly overestimated, the budget process does not allow for the $1.7 billion to be lowered as a result.

    (For clarity’s sake, whenever the ongoing MIP is raised, PLFs will generally have to be adjusted; the ongoing MIP is treated as additional interest in the calculation of the PLFs.)

    If you are confused by all of this, you are not alone. If you read some RMD stories and related comments during May 2009 and throughout the rest of last year, you will see how few, including long time veterans and executives, really understood the $798 million positive credit subsidy request and what it represented. As stated several times before, the move of the HECM program from the General Insurance Fund category to the Mutual Mortgage Insurance Fund category has changed the significance of the HECM budget exercise which occurs each and every year. It is hoped that with improved home appreciation rates in future years, the budget projections will not be nearly as harmful to the HECM program as they are right now.

    One question which remains is at what level will the lending limit be legislatively set as of January 1, 2011? Let’s hope it is no lower than $550,000 although it really needs to stay at $625,500. It is scheduled to return to $417,000 on that date unless Congress acts.

    Being a HECM originator right now just may not be for the faint of heart.

  • There is some controversy as to whether or not FHA can automatically take the ongoing HECM MIP from its current annual rate of 0.5% to 1.25% without this type of legislation. This bill will remove the controversy and will allow FHA to do just that. We need this bill to be enacted and to become effective before October 1, 2010.rnrnThe bill will provide one of the two crucial things needed to avoid crippling reductions to the principal limit factors (u201cPLFsu201d) on HECM closings occurring during the fiscal year ending September 30, 2011 on HECMs originated in that same fiscal year. Some are now estimating the positive credit subsidy at $1.7 billion on this cohort of HECMs. That is a whopping $900 million higher than the positive credit subsidy requested for about the same number of HECMs estimated to be originating and closing during the current fiscal year. Some of us familiar with elements of the budget request last year had guestimated (a combination of guessed and estimated) that the amount for this year had to be above $1.05 billion ($798 million plus $250 million) but how much more was unknown. Most of us felt it was closer to $2 billion but how much closer, we simply had no idea.rnrnEven if the bill is enacted and goes into effect before October 1, 2010, we still need $250 million in appropriations (or another source) or we will suffer further reductions in the principal limit factors in effect on September 30, 2009 beyond the 11% – 15% reductions already projected to go into place on October 1, 2010. Even though the estimate for HECMs originating and closing during the fiscal year ending September 30, 2011 is firmly believed to be greatly overestimated, the budget process does not allow for the $1.7 billion to be lowered as a result. rnrn(For clarityu2019s sake, whenever the ongoing MIP is raised, PLFs will generally have to be adjusted; the ongoing MIP is treated as additional interest in the calculation of the PLFs.)rnrnIf you are confused by all of this, you are not alone. If you read some RMD stories and related comments during May 2009 and throughout the rest of last year, you will see how few, including long time veterans and executives, really understood the $798 million positive credit subsidy request and what it represented. As stated several times before, the move of the HECM program from the General Insurance Fund category to the Mutual Mortgage Insurance Fund category has changed the significance of the HECM budget exercise which occurs each and every year. It is hoped that with improved home appreciation rates in future years, the budget projections will not be nearly as harmful to the HECM program as they are right now.rnrnOne question which remains is at what level will the lending limit be legislatively set as of January 1, 2011? Letu2019s hope it is no lower than $550,000 although it really needs to stay at $625,500. It is scheduled to return to $417,000 on that date unless Congress acts. rnrnBeing a HECM originator right now just may not be for the faint of heart.

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