Moderate-income homebuyers got a big boost from Congress at the end of July, when the House voted 415-7 to approve a bill revitalizing the federal government's biggest mortgage program - the Federal Housing Administration.
The bill, which now awaits Senate action, would allow the FHA to offer zero-down-payment loans for the first time, increase permissible mortgage amounts substantially in high-cost markets, and provide low interest rates and consumer protections that are rarely available from "subprime" mortgage lenders.
The legislation would also effectively open the FHA marketplace to mortgage brokers, who are by far the largest source of home mortgages originated nationwide.
With brokers able to offer both private-market subprime and FHA-insured mortgages, buyers with less-than-perfect credit will be able to directly compare FHA's rates, fees and consumer protections with competing subprime loan offerings.
For example, rather than paying 9 percent for a low- or no-down-payment mortgage with a hefty prepayment penalty from a subprime lender in the current market, a buyer might be able to obtain a low- or no-down-payment FHA mortgage for 6.5 percent or 7 percent with no prepayment penalties.
FHA mortgages also come with guaranteed "loss-mitigation" protections requiring lenders to pursue remedial steps whenever borrowers fall behind on payments, rather than rushing to foreclose.
Private subprime lenders, by contrast, often have no mandatory remedial responsibilities. Miss a few payments and you are toast.
The House bill, the "Expanding American Homeownership Act of 2006" (H.R. 5121), would reopen the FHA program to consumers in large swaths of the country where home prices far outstrip statutory limits on maximum FHA mortgage amounts.
In high-cost areas, the FHA maximums would increase to the median home-price level, but not beyond the loan limits of congressionally chartered Fannie Mae and Freddie Mac, currently set at $417,000.
The Fannie Mae-Freddie Mac limits move up annually as home prices increase.
Rep. Maxine Waters of California, one of many liberal Democrats who joined with Republicans in support of the bill, estimates that more than 120,000 residents of her state lost the opportunity to apply for consumer-friendly FHA mortgages over the past six years solely because home prices in the state exceeded the FHA's limits.
