Next steps for FHA bills

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NEW YORK (CNNMoney.com) -- A Senate bill that would expand the functions of the Federal Housing Administration (FHA) could help upwards of 200,000 homeowners - though a similar House bill that passed last month is more aggressive.

Christopher Dodd (D - Conn.), the sponsor of the Senate bill, which passed last week, hopes to make low-cost, fixed-rate mortgages available to more homebuyers and to homeowners seeking to refinance out of expensive adjustable rate mortgages (ARMs).

"This measure can shield homeowners from harm by helping families find safe, fair and affordable mortgages," said Dodd in a statement. It can help provide credit, both for new homeowners and those seeking a way out of abusive loans in which they are currently trapped."

FHA-insured loans have become an important element in the proposed solutions to the subprime mortgage crisis. There is bipartisan Congressional support for the measures and from the Bush administration.

FHA mortgages are consumer friendly loans made by private banks that are insured by the government. That makes them especially attractive to lenders because the government guarantee enables the lenders to easily sell off the loans.

Borrowers pay up-front premiums of 1.5 percent of the loan value, and 0.5 percent of the monthly payment each month. In return for that premium, the borrower gets a loan at a reasonable rate. The premium ends when the loan balance dips to less than 78 percent of the value of the home.

The Senate FHA-modernization bill differs in some significant ways from the House bill and is in addition to the FHASecure program that launched last summer, and was geared toward helping delinquent subprime borrowers refinance into affordable, fixed-rate loans.

Both the House and the Senate versions raise cap limits, the maximum dollar amount of mortgages that are eligible for FHA insurance, but the House bill is much more aggressive in nearly every one of its provisions.

The House would set the cap at $729,750, which is more than twice its current amount. That will give many more home buyers, especially those in high-priced areas like California, access to FHA-insured loans.

The cap under the Senate bill would max out at $417,000, the same amount as loans conforming to Freddie Mac and Fannie Mae limits.

If the House cap limit is adopted, the rough estimate of 200,000 eligible for help will expand, according to Bill Glavin, special assistant to the FHA commissioner.

The cap for low-priced areas in both bills would be raised to $271,050, again allowing more homebuyers into the program. The previous maximum was $200,160, less than the cost of building in many areas. "[With that cap] we've been priced out of new construction," said Glavin.

The House will also allow more people in by accepting no-money-down deals, unlike the current policy, which mandates a 3 percent down payment. The Senate bill still requires a down payment but halves it to 1.5 percent.

In addition, the House bill would extend the maximum term of the mortgage to 40 years from 35, again making the loans affordable for more homebuyers. The Senate bill does not change the term limit.

Another difference is that the House bill would introduce risk-based pricing into the FHA program for buyers putting down less than 3 percent. That would mean higher premiums for borrowers to pay for their greater risk of default. The Senate bill calls for a 12-month moratorium on the implementation of risk-based pricing.

Both bills relax the strict provisions that have kept FHA insured mortgages of limited use in buying condos and manufactured homes.

Both bills take aim at some of the shiftier lending practices of the past few years, especially those involving appraisal scams. The Senate bill would penalize any fraud having to do with an FHA mortgage. The House would impose civil penalties on anyone who exercises undue influence on appraisers in connection with an FHA-insured mortgage.

Appraisers have been subjected to intense pressure in the past to overvalue homes - it's called "hitting the number" - in order to make sales work. If home valuations come in at less than selling prices, deals fall through because borrowers can't obtain mortgages for the amounts they need.

Appraisers say they are often told, in so many words, to hit the number consistently by real estate agents and mortgage originators. If appraisers don't co-operate and overvalue the properties, they may be frozen out of future work.

The next step for the FHA modernization bill is for members of the House and Senate to work out the differences in the two versions. That may happen as early as this week.