August 31, 2007 / 5:04 PM / 12 years ago

FHA reform for home loans likelier after Bush speech

WASHINGTON (Reuters) - A U.S. federal program that could help bailout troubled subprime borrowers is likely to be passed by Congress now that President George Bush has endorsed key elements of a reform package.

On Friday, Bush promised to help less creditworthy subprime borrowers refinance into new loans by relaxing some aspects of the Federal Housing Administration’s loan insurance for high-risk home buyers.

The Federal Housing Administration, set up after the 1930s’s depression, helps borrowers win favorable loan terms by guaranteeing mortgage payments to lenders.

In a speech delivered in the White House Rose Garden, Bush endorsed his administration’s plan to help less creditworthy borrowers by lowering the required downpayment for FHA loans and raising the limit on mortgages that would be eligible.

Those provisions were part of a reform effort that passed the U.S. House of Representatives last year but got bogged down in the Senate.

Through the spring, the federal department of Housing and Urban Development has tried to sell FHA reform to lawmakers and the House is due to vote on the issue when lawmakers return from their summer break.

Some Senate Republicans have resisted FHA reform but Christopher Dodd, the Democratic chairman of the Senate Banking Committee, has said that passing legislation is a priority.

The urgency of the ongoing U.S. mortgage market crisis and Bush’s endorsement on Friday means the reform is likely to pass soon, said Howard Glaser, a mortgage analyst based in Washington and former HUD official.

“The president is softening up Republicans who have slowed down reform in the Congress. This puts some wind behind the sails of the legislation,” Glaser said.

During the recent U.S. housing boom, many borrowers who traditionally would have sought an FHA loan turned to subprime lenders who offered more flexible terms and less red tape.

Under existing rules, loans that exceed $362,000 are not FHA eligible which has effectively eliminated the program along the East and West Coasts where house prices are higher.

The federal program also requires borrowers to make a substantial downpayment while many subprime lenders, until recently, offered 100 percent financing.

The FHA share of new mortgages slipped from 9.1 percent to just 1.8 percent between 1996 and the end of 2006, according to industry publication Inside Mortgage Finance.

In large measure, Bush’s initiative was a response to tight standards on home loans that have evolved as subprime delinquencies have risen in recent months, causing a credit squeeze in world financial markets where investors had financed U.S. mortgage-linked securities.

“The president lending personal weight to this is a directly linked to the fact that there is no liquidity in the subprime market,” said Kurt Pfotenhauer, the top lobbyist for the Mortgage Bankers Association. “The FHA has become the only game in town.”

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