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Saturday, March 24, 2007

FHA: Out of the Dark Ages

by Tanta on 3/24/2007 01:51:00 PM

I had meant to post something on this a while ago; it’s a March 15 press release from HUD.

Assistant Secretary for Housing - Federal Housing Commissioner Brian Montgomery today reaffirmed the need to modernize the Federal Housing Administration (FHA) and give homeowners a better alternative to exotic high-cost mortgages. . . .

The National Association of Realtors reports that last year 43 percent of first-time homebuyers purchased their homes with no downpayment. Of those who did make a downpayment, the majority put down two percent or less. Modernization legislation, which overwhelmingly passed the House last year, would replace the FHA's stringent three percent minimum cash investment requirement with a flexible plan that allows homeowners to put down almost no money down, one, two or even ten percent.

To prevent the FHA from being priced out of many housing markets, the FHA's modernization legislation would also increase loan limits. Today, few buyers of homes in California or much of the Northeast have been able to use FHA financing because FHA's loan limits aren't high enough to meet the cost of most homes in those regions. By increasing and simplifying loan limits, FHA would once again be a major player in high-cost areas.

FHA modernization legislation would also create a new, risk-based insurance premium structure that would match the premium amount with the credit profile of the borrower. It would replace the current structure, in which there is standard premium amount for all borrowers, while still protecting the soundness of its Insurance Fund.

So, we have some interesting new terms to work with:

“Flexibility”: This is a good idea because a program that “allows” no down payment can also “allow” a 10% down payment. The old program “required” a 3% down payment, and “allowed” anything larger than that. That was inflexible, you see.

“Simplicity”: This is a good idea because a “simple” definition of a moderately-priced home—and thus a maximum FHA loan—can allow FHA to be a “major player” in the game of helping house prices keep going up and up and up. The “complex” definition of a moderately-priced home, on the other hand, might allow FHA to function as a drag on runaway home price appreciation by limiting financing options and thus helping to force prices downward.

“Modernization”: This is a good idea because having a large, fairly homogeneous risk pool, with some individual variation in credit quality, that is all priced the same way for insurance purposes, only worked in the Dark Ages. The new, modern, risk-based approach is much cooler, because there is no question that we know, precisely, how to price that risk, and that whole “group insurance policy” thing is never cheaper than individually-underwritten policies.

You may add those terms to the “Ownership Society” dictionary.