Budget Plan Would Reward Subprime FHA Borrowers for Timely Payments

The unveiling of the president's budget for fiscal year 2004 last week provided a few surprises for Federal Housing Administration lenders - including a new loan product that is designed to reach subprime borrowers and reward them for making monthly mortgage payments on time.

"The budget proposes a new single-family loan guarantee product that extends FHA insurance to borrowers who cannot meet existing underwriting standards due to poor credit ratings," according to the president's budget.

HUD officials declined to provide specifics about the new loan product, except to say it is "under development."

However, budget documents reveal the FHA subprime mortgage would have a higher downpayment requirement than a normal FHA loan and the annual mortgage insurance premium would be 1% - twice the normal premium.

In addition, borrowers would be rewarded with a premium reduction if they make their monthly mortgage payments on time for 24 months.

"The proposal will create new homeownership opportunities for more families with poor credit records who are served at a higher cost in the subprime market or not at all," according to highlights of the Department of Housing and Urban Development's budget.

The HUD budget also revealed that the FHA is preparing to reduce multifamily insurance premiums from 57 basis points to 50 bp starting Oct. 1 - the beginning of FY 2004.

"That will lower the cost of building new affordable rental renting housing," FHA commissioner John Weicher told reporters. And increase construction by 40,000 units in FY 2004. HUD estimates the FHA will finance the construction of 170,000 rental units in FY 2003.

He explained that HUD is able to reduce MF annual premiums because of better and faster recoveries on foreclosed multifamily projects and multifamily loan sales.

"We are selling notes faster than we were able to do before and selling them at a higher rate of return," Mr. Weicher said at a press briefing.

Meanwhile, the Bush administration has endorsed a recommendation by the Millennial Housing Commission that would allow public housing authorities to mortgage their properties to pay for capital improvements.

The FY 2004 budget proposal provides a credit enhancement for public housing mortgages that would guarantee 80% of the loan amount. "With $131 million of credit subsidy, we believe we will be able to leverage anywhere from $1.5 billion to $2 billion in addition capital funds to deal with the capital needs of public housing," HUD assistant secretary Michael Liu said.

The president's budget provides $31.3 billion in funding for HUD in FY 2004, a 1.3% increase from the FY 2003 budget proposal. (The House and Senate conferees are still working on the FY 2003 appropriations bills for HUD and scores of other U.S. agencies.)

"This budget reflects the realities of national defense and homeland security while continuing to offer greater opportunities for families seeking the American Dream," HUD secretary Mel Martinez said.

Consistent with the small increase in funding, the HUD budget increases funding for housing counseling by $10 million to $45 million and the HOME program by $133 million to $2.2 billion. HOME is a flexible program that allows states and local governments to build or renovate affordable housing for low-income families. Downpayment assistance totaling $200 million is provided under the HOME program.

The HUD budget also increases funding for Habitat for Humanity and other "sweat equity" homebuilding programs by $23 million to $65 million.

As part of the administration's tax agenda, President Bush is asking Congress to approve a new tax credit program that would spur construction and renovation of affordable single-family homes in distressed neighborhoods. The president promoted the single-family housing tax credit proposal during the 2000 election campaign.

Besides funding programs, the president's budget proposal also voices support for HUD's efforts to simplify the homebuying process and reduce the cost of buying a home by an average of $700.

"The administration is reforming real estate settlement procedures to make the homebuying process more consumer friendly by making settlement agreements and paperwork easier to understand. Buyers also will be able to shop for settlement services at the best package price," according to the budget.

HUD is still reviewing over 40,000 public comment letters the agency received on its settlement services reform proposal. "We are in the process . of starting to consider how we might revise the rule," Mr. Weicher told reporters. "But we are not in a position to comment on how the final rule will look like."

The president's budget also directs HUD to combat fraud in the FHA single-family program and improve risk management.

A summary of administration concerns about the FHA program notes that the agency will issue a final rule to curb property flipping soon and the FHA is expanding its Credit Watch program to monitor loan performance by FHA underwriters. Credit Watch is critical to protect the FHA Mutual Mortgage Insurance Fund from unexpected losses due to mismanagement or fraud.

The HUD budget also provides $20.7 million for the FHA to improve its outdated information systems.

In a recent report, the General Accounting Office pointed out that the FHA is still running its day-to-day operations with legacy systems. "FHA implemented a new general ledger in October and plans to develop an integrated financial management system over a five-year period."

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