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How the FHA Reform Bill Will Impact You

By B Wood
Aug 1st, 2013

fha reform billThe Senate Banking Committee passed the FHA Reform Bill by a vote of 21 to 1 on Wednesday. The FHA insures around one third of American mortgage loans. Mortgage lenders heavily rely upon the FHA to issue home loans to clients with less than a 20% down payment. They have been providing borrowers with low down payment, affordable home loans for decades and are now facing a financial shortfall of over $16 billion.

Tim Johnson, South Dakota Democrat and Chairman, said “This bill will give the Federal Housing Administration the tools it needs to get back on track, so it can continue to help qualified borrowers realize the dream of homeownership and provide stability to the housing market in times of stress.”

Prior to the vote some changes were made to the proposed FHA Reform Bill. A major change in the bill allows the FHA to transfer mortgage loan servicing to a third party provider. As a consumer this means that while your home loan could be issued by the FHA, another company would collect payments on their behalf and answer any loan questions you may have. This is common in the mortgage industry as many lenders do not conduct their own servicing. For example a Bank of America home loan could be issued by the bank, with a BofA loan number but serviced by XYZ company. This can create confusion for some homeowners as they are expecting to reach one company, while speaking with another.

This does, however, create economic opportunity for small businesses that specialize in loan servicing. The private sector has consistently promoted its ability to provide better solutions, at a lower cost, than the government. This could be their opportunity to demonstrate how well they can perform. For homeowners the results will be determined by the servicers customer service and responsiveness. Since servicers would have to compete for the business, it could save the tax payers money.

The bill would also require minimum mortgage insurance premiums at a higher rate than what borrowers are paying right now. This would increase the total monthly mortgage payment for homeowners, but at an affordable level. Once a borrower secured an FHA home loan, with less than a 10% down payment, they would continue to pay the mortgage insurance premium for the life of the loan.

If the FHA Reform Bill passes the Senate the organization would be required to have an annual stress test to ensure its continued financial stability. This could help tax payers avoid any surprise bail out requests by identifying challenges quickly enough to rectify them.

Senator David Vitter, R-Louisiana, said, “The FHA is broke, plain and simple, and we absolutely have to get the taxpayers out of the bailout business.”

The Senate is likely to vote on the bill after its recess in August. Homeowners, and mortgage bankers, throughout the country look to the FHA to continue providing affordable home loans. This proposed bill is aimed at ensuring they will be able to do so.