Amendment Bans Defaulting Borrowers
By Brian Collins
WASHINGTON-In passing a Federal Housing Administration reform bill, the House of Representatives approved an amendment that bans lenders from making FHA loans to borrowers who defaulted on their previous mortgage even though they had the capacity to make the payments. (Read further in this article to see what it does to borrowers ability to get Conventional loans).
The FHA bill that was approved by a 406-4 vote directs the Department of Housing and Urban Development to issue guidance and standards that lenders will use to screen borrowers who may have been involved in a strategic default.
The main focus of the bill is to give the FHA mortgage insurance program more flexibility to adjust its premium structure and help rebuild the insurance fund's capital reserves.
The bill (H.R. 5072) also strengthens the agency's hand in getting lenders to indemnify the FHA for bad loans and to terminate lenders with excessive early default rates.
But in a surprise move, Republicans offered a motion to send the bill back to the House Financial Services Committee unless the House agreed to the strategic default amendment. The amendment was accepted and the House sent the FHA reform to the Senate.
More and more homeowners with negative equity are being drawn to the idea of strategic defaults as house prices show little sign of recovery any time soon.
First American CoreLogic reported that 4.9 million borrowers have mortgage debt that exceeds the value of their house by 25% and 14% of those borrowers are 90 days or more past due on their payments.
How does a Strategic Default effect borrowers ability to get Conventional financing? Read on....
How does a Strategic Default effect borrowers ability to get Conventional financing? Read on....
Fannie Mae recently announced a "get tough" policy on strategic defaults. The government-sponsored enterprise said it will take legal action against borrowers who opt for a strategic default and seek to recoup the borrower's remaining mortgage debt in jurisdictions that allow deficiency judgments.
In addition, such borrowers will not be eligible for a Fannie Mae-backed loan for seven years under the new policy.
If the Senate accepts the strategic default provision, FHA lenders will have to sort out if mortgage applicants defaulted due to financial hardship or simply because it no longer made economic sense to continue making the payments.
Overall, HUD officials were pleased with the House-passed bill. HUD secretary Shaun Donovan said the bill would enable the FHA to "reform its current mortgage insurance premium structure by shifting some of the upfront cost to the annual premium, a move that will increase the FHA's capital reserves and reduce risks" to the government insurance fund.
The FHA raised its upfront premium to 2.25% earlier this year to help recapitalize the FHA insurance fund. But the FHA would prefer to lower the upfront premium and raise the 55 basis point annual premium.
As passed, H.R. 5072 allows the FHA to reduce its upfront premium to 1% and raise its 55 bp annual premium to 85 bps on single-family mortgages with loan-to-value ratios up to 95% and to 90 bps for LTVs above 95%.
FHA officials estimate this change would increase FHA revenue by $300 million a month.
The House also approved an amendment by Reps. Anthony Weiner, D-N.Y, and Gary Miller, R-Calif., that increases the FHA multifamily loan limit for elevator properties in high-cost areas.
"This amendment will allow the FHA to facilitate the construction and rehabilitation of apartments, particularly in urban areas where financing is not readily available in the current economic environment," according to its supporters.
Raising the FHA multifamily loan limit is one of the Mortgage Bankers Association's top legislative priorities.
But the MBA is concerned that indemnification provisions for bad loans gives the FHA too strong of a hand.
When the Senate takes up the FHA reform bill, MBA chairman Robert Story said, "We hope it will adopt the House language on multifamily loan limits and that the Senate will work to keep a careful balance that will allow the FHA to address lender enforcement and loan indemnification without discouraging responsible lenders from participating in the FHA program."
