House committee passes bill to make FHA loans less expensive

Mortgage & Real Estate

The House Financial Services Committee passed a bill Wednesday that would limit mortgage insurance payments on loans backed by the Federal Housing Administration.

The bill – H.R. 3141, “The FHA Loan Affordability Act of 2019” – would repeal FHA’s policy that requires borrowers to pay mortgage insurance for the life of the loan. Instead, payments would cease when the outstanding loan balance reaches 78% of the home’s original value.

But this is not the first time such a bill has made its way to the House.

Back in October 2017, Rep. Maxine Waters, D-CA, proposed nearly identical legislation to end FHA’s life of loan requirement, but the bill failed to take off, even though Waters had nine trade groups backing it.

In fact, the FHA used to cap insurance payments at this 78% threshold but changed its policy back in 2013 in an effort to improve the health of its flagship insurance fund.

The FHA needed a $1.7 billion bailout in 2013, due to the significant shortages in the FHA’s MMI Fund. Since then, the fund has found solid footing, and many in the housing industry are strengthening their call to ditch the life of loan policy and reduce the cost of FHA financing to borrowers.

And now, with the MMI Fund on better footing, lawmakers are again pushing for the elimination of the life of loan policy. 

The Community Home Lenders Association expressed its support for the bill, calling the FHA’s current policy discriminatory against borrowers.

“The FHA Life of Loan policy is unfair to FHA borrowers because it significantly overcharges them,” the CHLA wrote, estimating the additional cost to be $15,000.

“This is a significant impediment to asset building, and results in total premiums that are wildly disproportionate to the risk a loan poses to FHA,” the group stated, adding that the policy is hurting the FHA’s financial performance.

“The Life of Loan factor can tilt a borrower to a refinance out of FHA and into a conventional loan, even when the savings are limited and the traditional wisdom about refinancing calculations argue against a refinance,” the group wrote. “The result is that FHA loses many seasoned loans, along with the revenue that goes with those loans.”

The bill was introduced by Rep. Dean Phillips, D-MN, and was passed out of the committee by a vote of 34 to 25. Next, it will move on to the House floor.

 

 

 

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