Legislation introduced in the House by Al Green, D-Texas, would scuttle plans to eliminate seller-funded down-payment assistance as an option for loans guaranteed by the Federal Housing Administration, but allow FHA to implement risk-based premium pricing.
The Bush administration has sought to end the practice of allowing seller-funded "gifts," saying they artificially inflate home prices and triple the likelihood a loan will default. Supporters, who say minorities will be disproportionately affected if the programs are abolished, had thwarted the Department of Housing and Urban Development’s previous attempts to end the practice (see story).
But beginning Oct. 1, the sweeping housing bill signed into law last week by President Bush, HR 3221, will prohibit FHA from recognizing seller-funded "gifts" from nonprofits that are largely funded by home builders as a valid form of down-payment assistance (see story). Borrowers would still be able to use gifts from family members, charities and employers to meet FHA’s new 3.5 percent minimum down-payment requirements.
A bill introduced Thursday by Green, HR 6694, would allow FHA to continue to recognize seller-funded down-payment assistance when borrowers have a FICO score of 680 or greater. Borrowers with FICO scores of between 620 and 680 would also be able to rely on seller-funded gifts of up to 3 percent of their loan principal, but would have to pay increased mortgage insurance premiums.
Green’s bill — introduced the day after Bush signed HR 3221 into law — would also allow borrowers with FICO scores of 619 or less to rely on seller-funded down-payment assistance beginning in fiscal year 2010, if HUD determines that the loans can be insured without incurring taxpayer expense.
FHA loan guarantee programs have historically been self-sustaining, with mortgage insurance premiums covering claims. The Bush administration has said that because of their higher default rates, loans relying on seller-funded gifts threaten to put the program in the red.
In another attempt to avert the need for a taxpayer subsidy, HUD has sought to implement risk-based premium pricing, saying it would allow FHA to operate more like private mortgage insurers.
Traditionally, all FHA borrowers have paid 1.5 percent of their loan balance up front, and 0.5 percent a year for insurance. Under risk-based pricing, the upfront premium would range from 1.25 percent to 2.25 percent, depending on credit score. HUD says the difference amounts to no more than $7 a month on a $150,000 mortgage.
Although HUD went to a risk-based pricing model on July 14, HR 3221 places a one-year moratorium on its implementation, beginning Oct. 1, 2008 and ending Sept. 30, 2009.
As a carrot to the administration, Green’s bill would allow FHA to implement risk-based pricing — with a provision that borrowers who pay higher premiums eventually receive partial refunds if they stay current on their loans.
HR 6694 is co-sponsored by Democrats Rep. Maxine Waters of California and Christopher Shays of Connecticut, and California Republican Rep. Gary Miller.
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