Summary and Background
The Federal Housing Administration (“FHA”) was established during the height of the Great Depression by the Housing Act of 1934. By offering government-backed insurance for the full balance of a loan, the FHA was created to encourage the private sector to return to the mortgage market and aid the increasing number of families who were defaulting on their loans and losing their homes. Since then, the FHA has helped millions of underserved Americans secure heir dream of homeownership.
Today, a record number of American families are facing mortgage payment delinquencies and foreclosures. An estimated two million households may lose their homes to foreclosure between 2007 and 2008, resulting in hundreds of billions of lost home equity, principally in the risk-laden and problematic “subprime” mortgage market. The increase in subprime mortgages seems to be at the expense of FHA loans. In the past decade, FHA has seen its market share drop dramatically and “experienced a sharp decrease among minority and lower-income populations where it traditionally has had a stronger presence.” (Government Accountability Office, 6/07). This is, in part, attributable to statutory restrictions on FHA products that have not been updated to reflect the current market reality and the need for process improvements to facilitate the administration of the program.
S. 2338, the FHA Modernization Act of 2007, would strengthen and modernize the Federal Housing Administration (“FHA”) to help homeowners facing foreclosure obtain safe and affordable home loans. S. 2338 would address problems in the mortgage market that have shut off funding for home loans and would make FHA loans a more viable alternative to the subprime market and help to bring stability to the economy and local communities. A bipartisan measure, the bill is a product of extensive consultation between the Senate and the Bush Administration, and it has the support of both consumer and industry groups. The Senate is expected to consider this legislation in mid-December 2007.
Expanding the benefits of FHA insurance to a larger number of families in need. S. 2338 would:
· Raise loan limits across the board – at both the high end and the low end;
· Simplify downpayment requirements; and
· Make FHA insurance more accessible to people buying or refinancing condominiums and cooperatives.
Helping families keep their homes and avoid foreclosure. S. 2338 would:
· Expand access to post-purchase homeownership counseling for low- and moderate-income homeowners who are having trouble making their mortgage payments; and
· Establish a demonstration project to determine the most effective form of pre-purchase counseling for first-time home buyer.
Enabling more seniors to safely convert their home equity into cash. S. 2338 would:
· Remove the current cap on the number of “reverse mortgages” made through Home Equity Conversion Mortgage (“HECM”);
· Raise the loan limit of HECM to a single national loan limit to match the loan limit of government-sponsored enterprises (currently $417,000);
· Lower the origination fee by 25 percent to 1.5 percent; and
· Make HECM, which is currently authorized as a demonstration program, a permanent feature of FHA.
Supporting homeownership preservation. S. 2338 wouldrequire the Department of Housing and Urban Development and FHA to work with industry, the Neighborhood Reinvestment Corporation, and other non-profit organizations to improve the FHA loss mitigation process so that more troubled homeowners can retain their homes.
Enhancing fraud protection. S. 2338 would require FHA to establish a screen to detect and prevent fraud, and by increasing the penalties for committing fraud against FHA.
Expanding access to credit for borrowers with “thin” credit histories. S. 2338 would establish a five-year pilot program to test alternative automated credit rating systems for borrowers without sufficient credit histories at traditional credit bureaus. The pilot may include alternative credit rating information such as rental, utility, and insurance payments.
Modernizing and expanding the manufactured housing program. S. 2338 would:
· Restructure FHA insurance for manufactured housing, which provide an affordable housing option for approximately 17 million Americans; and
· Increase consumer protections for residents of manufactured homes.
On November 13, 2007, Senator Dodd introduced S. 2338, which was referred to the Senate Committee on Banking, Housing, and Urban Affairs and reported to the Senate with written report, and placed on the Senate Legislative Calendar under General Orders (Calendar No. 481).
The Senate agreed to a unanimous consent agreement under which only the following two first degree amendments are in order:
· Dodd-Shelby amendment – relating to a moratorium; and
· Coburn amendment – relating to reverse mortgages.
Under the agreement, the time for debate for each amendment is limited to 60 minutes equally divided and controlled in the usual form.
The DPC will distribute additional information on these amendments as it becomes available.
Statement of Administration Policy
At the time of publication, the Bush Administration had not issued a Statement of Administration Policy (SAP) for S. 2338.
Report 110-227, FHA Modernization Act of 2007 (November 13, 2007), available S.R227.110.pdf">here.
GAO-07-645, Federal Housing Administration, Decline in the Agency’s Market Share Was Associated with Product and Process Developments of Other Mortgage Market Participants (June 1007), available here.
 HECMs allow seniors to convert equity into cash by taking out a “reverse” mortgage where the lender pays the borrower either a lump sum or a monthly payment. The borrower makes no payments until the ownership of the home is transferred through sale or inheritance.