HUD No. 07-029
March 15, 2007
FHA COMMISSIONER: HOMEOWNERS NEED A SAFER ALTERNATIVE TO RISKY MORTGAGES
Montgomery says time is ripe for FHA modernization
WASHINGTON - Concerned that high-priced, high-risk mortgages are hurting low- to moderate-income borrowers, Assistant Secretary for Housing - Federal Housing Commissioner Brian Montgomery today reaffirmed the need to modernize the Federal Housing Administration (FHA) and give homeowners a better alternative to exotic high-cost mortgages. Speaking at a U.S. Senate Appropriations Subcommittee hearing, Montgomery urged Congress to pass legislation that enhances the FHA's government-insured mortgage products and "provides lower-income families safe, secure homeownership opportunities."
"Many first time and minority homebuyers face significant challenges when trying to purchase a home. In recent years, such difficulties have resulted in many of these individuals assuming risky, adjustable-rate, subprime loans. The impact on African American and Latino borrowers has been particularly profound," said Montgomery at a hearing of the Senate Appropriations Subcommittee on Transportation, Housing and Urban Development, and Related Agencies.
According to 2004 HMDA (Home Mortgage Disclosure Act) Data 40 percent of African Americans and 23 percent of Hispanics pay an interest rate three percent higher than the market rate. The Center for Responsible Lending reports that 51 percent of refinancing transitions in African American neighborhoods are sub-prime loans.
"There needs to be a mortgage alternative which will qualify a wide swath of borrowers and simultaneously provide them with the loan options they require...enter a modernized and reinvigorated FHA. Everyone should have access to a safe, affordable mortgage product; and this should not change just because that person is a first-time homebuyer, a minority homebuyer, or a homebuyer with troubled credit history," added Montgomery.
Created in 1934 to stimulate the housing market during the Depression, the FHA has helped more than 34 million families over the past 73 years become homeowners. But as lending practices have evolved and modernized, the FHA has been slow to do so, and reforms must be made for this critical mortgage insurance program to adapt to today's marketplace.
The National Association of Realtors reports that last year 43 percent of first-time homebuyers purchased their homes with no downpayment. Of those who did make a downpayment, the majority put down two percent or less. Modernization legislation, which overwhelmingly passed the House last year, would replace the FHA's stringent three percent minimum cash investment requirement with a flexible plan that allows homeowners to put down almost no money down, one, two or even ten percent.
To prevent the FHA from being priced out of many housing markets, the FHA's modernization legislation would also increase loan limits. Today, few buyers of homes in California or much of the Northeast have been able to use FHA financing because FHA's loan limits aren't high enough to meet the cost of most homes in those regions. By increasing and simplifying loan limits, FHA would once again be a major player in high-cost areas.
FHA modernization legislation would also create a new, risk-based insurance premium structure that would match the premium amount with the credit profile of the borrower. It would replace the current structure, in which there is standard premium amount for all borrowers, while still protecting the soundness of its Insurance Fund.
"I believe that FHA should play a stronger role in the national mortgage market...Homebuyers deserve better, and our goal - through this Modernization proposal - is to provide them just that," concluded Montgomery.
For more information about the FHA visit www.FHA.gov.
HUD is the nation's housing agency committed to increasing homeownership, particularly among minorities; creating affordable housing opportunities for low-income Americans; and supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development, and enforces the nation's fair housing laws. More information about HUD and its programs is available on the Internet and espanol.hud.gov. For more information about FHA products, please visit www.fha.gov.