House Republicans are provoking a fight with the powerful National Association of Realtors by drafting legislation that would curtail the number of loans backed by the Federal Housing Administration, the main source of mortgage money for first-time home buyers.
GOP lawmakers have made scaling back government support of the housing market a key priority. However, they are encountering resistance from Realtors and many Democrats, who believe such support is essential to keep the moribund housing market from sinking further.
Home buyers who take out FHA loans pay insurance premiums to the government. That money is used to pay claims to lenders when borrowers default. Currently, homeowners are able to take out FHA-backed loans with a minimum down payment of 3.5% as long as they have a relatively healthy credit score.
A draft bill to be discussed at a House subcommittee hearing Wednesday would raise the minimum down payment to 5% in an effort to require the agency to make safer loans and stabilize the agency’s finances, which deteriorated in the wake of the housing bust.
Rep. Judy Biggert (R., Ill.), said in a statement Monday that Republicans aim to redesign government mortgage programs to strike “the right balance for taxpayers and home buyers.” The legislation also would make a significant cut to the maximum size of loans backed by FHA in many parts of the country.
The maximum size of loans that can be backed by FHA in expensive parts of the country is already scheduled to go to $625,500 from $729,750 on Oct. 1. However, in areas where home prices are more modest, that limit is scheduled to fall as low as $271,050.
The GOP bill would allow those limits to fall even more—to 125% of a county’s median home price.
In some parts of the country, the GOP bill would result in far-lower loan limits than those that are scheduled to go into effect in October, according to data compiled by the Realtors. For example, the limit would be nearly $440,000 lower in Accomack County, Va. and about $351,000 lower in Baltimore.
“While we support reforms to strengthen the program, changes should not be made at consumers’ expense by drastically impacting the affordability and availability of mortgage capital,” said Ron Phipps, NAR’s president, in a prepared statement.
Brian Chappelle, a mortgage industry consultant, said such a move would also be bad for FHA’s fiscal health because it would eliminate loans on more expensive properties, which tend to have lower rates of default.
The bill, however, could be good for private mortgage insurers such as PMI Group Inc. and MGIC Investment Corp., which compete with FHA, but could hurt the housing market in the short term, said Jaret Seiberg, a financial policy analyst at MF Global’s Washington Research Group.
“It would make it even harder for first-time buyers to enter the housing market regardless of their incomes or earnings potential,” Mr. Seiberg wrote in a note to clients.
Loans backed by the FHA made up nearly 18% of new loans made in the first quarter, according to trade publication Inside Mortgage Finance.
The FHA doesn’t make loans but rather insures them against default. The agency’s volume grew rapidly in the wake of the mortgage bust, sparking warnings that the agency would need government funding for the first time in its history.
The Obama administration hiked fees and tightened lending standards, and an audit released last year showed the agency’s finances have started to stabilize.
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