FHA Reform Legislation: Too Much Reform?

Implications: The House passed comprehensive FHA reform legislation on Sept. 18 and the Senate is likely to act later this year.  The House bill lowers underwriting standards and will enable subprime borrowers to refinance into FHA insured mortgages.  But some could argue that the legislation simply shifts risks from investors to the Government.

Analysis: The House of Representatives passed far ranging FHA Reform legislation on September 18, 2007.  The bill was amended to open FHA insurance for subprime borrowers with FICO scores as low as 560, and will allow refinancing for borrowers that are delinquent on their current mortgage.  LTV limits are raised to 100 percent, the the current requirement for a cash down payment may is waived.  This reform legislation may wind up exposing the U.S. Treasury to significant future liability, and could itself become the subject of future reform proposals.  The real question is whether this version is likely to pass the Senate, or if a more moderate bill will eventually emerge.