The House of Representatives has just approved by a 406-4 vote the Federal Housing Administration Reform Act, a law designed to shore up the finances of the agency which now guarantees nearly one-third of the nation's mortgages. 

The new law gives FHA the authority it had requested to raise the ceiling on the annual premiums it charges borrowers for its guarantee, raises the limits on multifamily housing in certain high cost communities and in elevator buildings, and authorizes some previously announced provisions to increase enforcement of FHA lenders.

Earlier this year FHA announced it intended to raise its premiums in a two-step process that was part of a larger program to put itself back on a firm financial footing. The first step, raising the up-front premiums due from the borrower at loan closing was already possible under existing authority. Effective April 9, 2010 those upfront premiums went from 1.75 percent to 2.25 percent.  However, the FHA was not able to raise the annual premium without the permission of Congress as it was already at the authorized ceiling.  Under the law passed today the agency will be allowed to increase its annual premium to 1.50 percent of the unpaid balance of the loan. This shift will allow for the capital reserves to increase with less impact to the consumer because the annual MIP is paid over the life of the loan instead of at the time of closing.

Here are the previously announced provisions to increase enforcement of FHA lenders:

  • Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders.This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite
  • Legislative authority permitting HUD maximum flexibility to establish separate “areas” for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches

HUD Secretary Shaun Donovan said,  "The FHA is playing a vital role in the current housing market. We must remain mindful that qualified, responsible families need continued access to affordable homeownership options. The changes that we are implementing coupled with this bill will ensure that FHA can continue to serve as a bridge to economic recovery and that mortgage financing remains available until private capital returns."

The Mortgage Bankers Association (MBA) was also quick to fire off an endorsement of the House actions.  Robert E. Story, Jr., Chairman of MBA said "The reforms contained in this bill will help stabilize FHA's finances by allowing the agency to raise its annual premiums and better take corrective actions against lenders who are putting the program at risk."

The bill must still gain passage in the Senate.

HERE is the CBO Estimate of Cost

HERE is the most recent bill summary provided by the CONGRESSIONAL RESEARCH SERVICE