FHA Reform May Change It’s True Purpose

Expanding American Homeownership Act of 2007 has been passed by the House and will most likely be passed by the Senate and signed by the President after a few minor adjustments. This is the biggest change to FHA that has occurred since it inception. If the House has it’s way, this would truly change the initial purpose of FHA from being an agency formed to help low income households to an agency that helps almost all Americans to be able to own and keep their homes.

Increasing FHA Loan Limits

Why am I saying this? FHA has always been geared toward helping low income, poor areas, to be able to provide buying houses. The new bill that is now before the senate proposes to increase the loan limits from $200,000-$350,000 to as high as $700,000 in areas with high median house prices. I personally don’t know any low income people that own $700k houses, except for those individuals that lied on their loan applications and “stated” that they made $10,000 per month as a janitor at Wal Mart and truly got the loan. Fortunately, Bush has stated that he will not allow this to happen. He intends to keep FHA’s purpose intact. I believe the Senate will do the same. Bush plans on keeping the FHA loan limit at $417,000 or below. We should see very soon.

Elimination of Audited Financials Requirement for Brokers

This is the second largest change to FHA. If this is passed by the House, it would open the door to about 90% of the nations mortgage brokers that were before restricted from becoming an FHA Approved Broker (Loan Correspondent) due to the cost obstacle. Most people don’t realize it, but audited financials can cost between $2,000 to $20,000 for the average small broker to acquire. The audited financials required by FHA must be completed by a CPA that has gone by a peer review and the minimum net worth must be $50,000 according to FHA’s stringent net worth calculation guidelines. Now, the 90% of brokers that did not have the time, money, and resources to put together audited financials, can put forth a surety bond in lieu of the audited financials. A surety bond is obtained by insurance companies and covers the consumer or third parties in a transaction and is payable by the mortgage company if drawn on by the state to pay a consumer or third party. The new bill proposes a bond between $50,000 and $100,000. Most analysts would agree that something similar to this will be in the amended bill when passed by the Senate.

What will be the affect of this Bill

Whether the FHA loan limit is increased to $700,000 in some areas or $417,000, the bill will change FHA’s purpose dramatically. Many people will be looking to FHA as a place to acquire a loan that traditional lenders are not able to provide. This is possible by FHA’s upfront mortgage insurance that is able to reduce the risk of higher debt-to-income and loan-to-value ratios. We will also see a huge surge of advertising for FHA when the majority of mortgage brokers are given access to be approved FHA brokers. Unfortunately, the House tends to think that this will be the solution to the current market problems. This is a great start, but I think it will take much more than this to bring an adjustment to all of the lies and deception that occurred in the last 5 years in the mortgage industry.

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