July 25, 2006

US House raises FHA loan limits, eases rules

By David Lawder

WASHINGTON (Reuters) - The U.S. House of Representatives on
Tuesday voted overwhelmingly to raise the Federal Housing
Administration's lending limits and ease downpayment rules to
make FHA assistance for first-time and low-income home buyers
relevant in high-cost housing markets.

The bill to modernize the FHA, sponsored by Ohio Republican
Rep. Bob Ney, was approved 415-7, easily surpassing a
two-thirds majority required for passage under House suspension

The bill amends the National Housing Act to change the
factors for determining the maximum single-family mortgage
amounts insurable by the FHA.

It allows the FHA to insure mortgages for up to the full
median house price in high cost areas and conform with lending
limits imposed on government-sponsored housing enterprises
Fannie Mae and Freddie Mac, and allow loan terms up to 40

It would eliminate the 3 percent minimum downpayment on
loans and scrap a flat mortgage insurance premium structure in
favor of tiered premiums based on the borrower's credit history
and debt-to-income ratio, the property's loan-to-value ratio
and on the FHA's historical experience with similar borrowers.

The FHA, a part of the Department of Housing and Urban
Development, provides mortgage insurance on loans made by
approved lenders, which helps to shield lenders from potential

For low-income buyers or those with little downpayment
cash, FHA mortgages are typically cheaper than insured private

But statutory FHA lending limits have been left behind by
the massive run-up in house prices in recent years,
particularly in urban areas, pushing low-income buyers to
higher-cost private mortgages aimed at the sub-prime market.

For example, the maximum FHA insurable mortgage for the
District of Columbia, is currently $362,790.

In June, Washington's median home sales price was far
higher than the FHA's limit, at $430,000, compared to $415,000
a year earlier, according to Metropolitan Regional Information
Systems Inc, which runs the area's real estate listing service.

In addition to making FHA programs more competitive, the
legislation also is viewed as aiding Ginnie Mae, the
government-owned housing finance company that securitizes more
than 95 percent of FHA mortgages. Ginnie Mae will be able to
lend more effectively in high-cost markets.

"Modernizing FHA will improve competition in the prime home
loan mortgage industry and effectively assist the industry in
combating abusive and discriminatory lending practices," Ney
said in a statement. "This bill helps further increase the
country's homeownership rate, especially among low- and
moderate-income and minority families."

The bill also eliminates the cap on federally insured
reverse mortgages, which allow the elderly to convert part of
their home equity into cash income without selling their