June 10, 2007
Over the past eight years, the Federal Housing Authority
has become less and less important.
Subprime lenders offering high-cost loans won away many
of the moderate-income first-time homebuyers who used to count on an FHA
guarantee to snare a mortgage.
Home prices rose far above FHA lending limits, set by
Congress and unchanged for years. And though the agency streamlined some of its
procedures, it still takes far longer than 24 hours to approve an FHA loan,
unlike the instant gratification that lures eager buyers to hard-marketing
The number of loans guaranteed by the FHA dropped
two-thirds nationally from 1999 to 2006, and nearly by half in Wisconsin
and Milwaukee County
from 2002 to 2006.
Now, the FHA's resurrection may be at hand.
Legislation aimed at modernizing obsolete FHA loan
standards is back in Congress, having died quietly last fall after passing the
Then, nobody much cared. They do now, says Megan H.
Booth, senior policy representative for the National Association of Realtors.
"This is a critical window. There's all this
congressional concern about the subprime mess, with horror stories in every
district. This is our time to get Congress to say: 'If we can reform this
program, we can give people a viable alternative that's not risky like these
crazy loans,' " she says.
"How many hearings has Congress had this spring on
subprime? A gazillion. FHA reform can't be a bailout to subprime problems, but
it can be a solution."
Sweeping changes in the mortgage market this decade
"shut them out. Now there's an opening," agrees Ann Grochala,
director of lending and accounting policy for the Independent Community Bankers
If the Expanding American Homeownership Act of 2007 does
pass, it would allow the FHA to consider what consumers have to pay for loan
guarantees as determined by their credit histories; increase the amount it
guarantees and thus come closer to the cost of houses in more expensive,
usually urban, markets; and make it easier to purchase condominiums with FHA
loan guarantees, lowering the first step into homeownership in pricey areas.
Currently, the FHA will guarantee mortgages up to
$218,405 in the metro Milwaukee
That's enough for Milwaukee
County, where the average price of
a house sold through a broker was $185,388 for the first quarter of this year,
according to the Metro MLS, or in Washington
County, which saw an average price
But it's a problem in Waukesha
County, where the MLS reported an
average sale price of $290,056, and in Ozaukee
County, with $288,777.
Raising the limit
The modernization bill would raise the limit to 100% of
the loan limit allowed by mortgage purchasers Fannie Mae and Freddie Mac for
high cost areas, and from 48% to 67% of the limit in lower-cost areas.
"If it were increased, it would provide more
options," says Delbert F. Reynolds, Wisconsin field
office director for the FHA. "Loan limits aren't the only issue. One of
the points of modernizing is to do some catch up with other tools, like not
requiring a down payment."
That is one of the controversial provisions in the
modernization proposal put forth by the Department of Housing and Urban
Development, which includes the FHA: eliminating the requirement for a down
payment of at least 3 percent. The new requirement would be some type of cash
contribution by the buyer at some point in the purchase process.
If the modernization legislation passes, it might bring
the FHA into the 21st century, where it faces more competition than ever for
historically overlooked moderate-income homebuyers.
Suddenly sober subprime lenders have stiffened loan
standards, to stanch losses and head off regulation, but they're still making
Meanwhile, local non-profits and city and state
government agencies have expanded their own home-buying assistance programs.
Last fall, for instance, the Housing Authority of the
City of Milwaukee quietly began
selling rehabbed houses to buyers who qualified for housing subsidies but
hadn't been in those programs.
Even if the proposed changes are adopted, the FHA will
remain just one voice in a chorus clamoring for the attention of first-time
buyers, says Geoff Smith, director of research with the Woodstock Institute, a
research non-profit based in Chicago.
"(The FHA) was designed to encourage banks to make
loans to borrowers who couldn't access them otherwise. Now there's an abundance
of access to credit, so the question is: Is the FHA still fulfilling a need?'
" he says.
"There are other agencies that have loan programs,
that offer loan down payments, and that are targeting the portion of the
subprime market with prime or close to prime. As a person who follows housing
policy and finance, I don't think of the FHA hardly ever," Smith says.
There's one market, at least, where the FHA's appeal
still shines. Homeowners with failing finances due to subprime loans are
flocking to the FHA's new Loss Mitigation Program.
HUD reports that since last October, 36,500 families
nationally and 228 in Wisconsin
have become FHA borrowers as they escape the consequences of predatory loans.