Senate Passes FHA Modernization Bill (93-1)

The U.S. Senate passed the FHA modernization bill this morning. An amendment requiring a 12 month moratorium on FHA’s implementation of risk-based pricing was added to the final bill. With passage by the Senate, enactment of the FHA bill is virtually guaranteed. However, since there are differences in the House and Senate bills, the bill must now go to a “conference” between House and Senate Banking committee leaders. We have attached the side-by-side highlights of the two bills that NAR prepared. With regard to the timing of the “conference”, the conventional wisdom is that there is not enough time to convene the “conference” prior to the Holiday recess. However, as everyone knows, these are not conventional times.

We do think the importance of the mortgage issue will compel Congress to make every effort to convene the “conference” ASAP (hopefully next week). We will keep you apprised.

Key Provisions

Below are the key elements of the bill. They are divided into two categories — those provisions that are identical in both the House and Senate bills and those provisions where differences exist. The differences will be resolved in the “Conference” of the House and Senate committee leaders.

Identical provisions in both bills

■  Mortgage limit (“floor”) will be raised from 48% to 65% of GSE limit ($271,050).

■  Condominium processing: It will facilitate FHA acceptance of GSE approved projects and possibly other projects depending on how FHA implements the provision

■  Reverse mortgages: Remove cap on volume, raise the maximum loan limit to $417,000 and allow reverse mortgages to be used for home purchases.

Different provisions in the House and Senate bills

■  Downpayment/cash investment:
Senate – 1.5% cash investment w/ maximum loan amount of 100% of sales price/value that includes the upfront MIP; House still has a 0% downpayment provision. We expect the Senate provision to be adopted.

■  Mortgage limit for “high cost” areas:
Senate – $417,000; House – up to $729,000. P2 expects the Senate provision to be adopted though there is an outside chance that the limit could be raised to about $500,000 in high cost areas. If the higher limit (above $417,000) fails in this bill, it is possible that the limit could be raised if the GSE mortgage limit is increased through a provision attached to another bill.

■  Seller participation in downpayment assistance programs:
Senate opposes seller participation in these programs; House strongly supports this program w/ changes. We will have to see how these conflicting provisions play out.

■  Moratorium on implementation of risk-based pricing:
Senate includes 12 month moratorium. We expect the Senate provision to be included in the final bill.

■  Broker surety bond in lieu of audit:
It is in the House bill only. We would be surprised if this provision is included in the final bill.

We believe that the provisions in the Senate bill will be followed to a significant degree because of the need for the bill to be acceptable to Senate Republicans (i.e. Minority has greater influence in the Senate). While the Senate usually has considerable clout in conferences, it may be difficult for the Senate to “win” on all three of the contested items (We assume Senate cash investment requirement and moratorium on risk-based pricing will be accepted by the House). Accordingly, it will be curious to see how the three contested items are resolved.

Timing

The outstanding questions are 1) When will the “conference” occur? and 2) When will the President sign the bill? . If the conference does not occur before the Holiday recess, the conference would be completed and the final vote would occur when both Houses of Congress return in mid-January.

When will the provisions of the FHA bill be effective?

After the final bill is passed by both Houses and the President signs the bill, the estimated timing of implementation of the key provisions is provided below.

■  Increase in FHA “floor”
The increase in the FHA “floor” ($271,050) becomes effective the day the President signs the bill.

■  Increased mortgage limits in high cost areas
FHA must analyze home sales data in affected areas to determine whether the loan limit should be raised. We understand FHA is already working on this change and should be published shortly after signing.

■  Lower cash investment (1.5%)
FHA must publish guidance to implement this change. We understand that FHA is already working on these instructions and it should be available w/i a week of signing.
■  Condominium changes
While FHA is already working on this change, we expect its implementation will take at least a month or two.