FHA Reform Bill to Allow Smaller Down Payments, Higher Fees

The Federal Housing Administration reform bill overwhelmingly approved in the U.S. House of Representatives last Thursday will strengthen the housing finance agency, but will likely prove to be mixed blessing for homebuyers.

The legislation, passed by a vote of 406 to 4, would raise fees for borrowers, give the FHA the power to oust lenders that are costing the agency too much money in claims, and make it easier for the FHA to protect itself from fraud-related losses. On the positive side, it will also allow borrowers to get mortgages with smaller down payments.

The primary purpose of the reform legislation – introduced by Rep. Maxine Waters (D-Calif.) – was to shore up the deteriorating finances of the FHA, an agency whose prominence in the mortgage business has skyrocketed lately.

The FHA doesn't make home loans; instead, it insures lenders against default. Less than four years ago, it was handling only 4 percent of home loan volume. Today, the agency insures roughly one-third of all new mortgages in the U.S.