FHA Reform Bill is a Dose of "Tough Love" for Potential Home Buyers

Earlier this month, the U.S. House of Representatives overwhelmingly passed a bill aimed at shoring up the shaky financial position of the Federal Housing Administration (FHA). While the FHA does not actually lend money, it insures the loans of millions of borrowers who, without this insurance, would not be able to qualify for a conventional lending product. FHA guidelines traditionally allow borrowers to qualify for loans with a much smaller down payment than those without FHA insurance. (3% down with FHA insured loans as opposed to 10-20% for borrowers who do not use the FHA program.)

As the credit crisis continues to slow the recovery of the housing markets nationwide, the role of the FHA has been radically expanded, with lenders less and less willing to risk writing loans that are not insured by the Federal Housing Administration. Less than four years ago, the FHA insured only 4% of America's home loans; now, that number has risen to roughly one third of all new home loans that are written.

As their involvement and importance has grown, however, the financial position of the FHA has worsened. By law, the FHA is required to hold 2% of the total volume of loans insured in the FHA's Mutual Mortgage Insurance Fund. As of September 30th, 2009 the FHA reported that its reserves had fallen to just $3.6 billion, representing a scant 0.53 percent of the $685 billion worth of FHA-insured loans at that time, and roughly a quarter of the reserves they are required to have on hand.

In order to improve the FHA's financial position, this reform bill, introduced by Rep. Maxine Waters(D-Calif.) raises fees for borrowers, gives the FHA the power to oust lenders that are costing the agency too much money in claims, and makes it easier for the FHA to protect itself from fraud-related losses. The fee hike is considerable in that it allows the FHA to raise the rate it charges borrowers from 0.55 percent of the amount of the mortgage to 1.5%...nearly triple. These premiums are paid by borrowers over the life of their loans, and the FHA says the premium increase will cost the average borrower around $42 per month.

Although a companion bill has not yet been introduced in the Senate, it is expected that legislation will be taken up after the July 4th recess and will most likely pass easily.

If you would like more information on purchasing investment properties in Las Vegas, please contact Glenn Plantone: (702) 769-9872 or gsplantone@gmail.com