September 17, 2007 / 6:00 PM / 12 years ago

Reverse mortgage limit scrapped in FHA reform: source

WASHINGTON (Reuters) - Two key leaders of the U.S. Senate Banking Committee have agreed to scrap a limit on the number of reverse annuity mortgages that a federal insurance program may underwrite, sources familiar with the discussions said Monday.

The mortgages, known as RAMs, are popular among older Americans because they allow them to draw income against the value of their property without having to leave their homes.

Existing rules for the Federal Housing Administration program cap the number of RAM loans at 275,000. But that would be eliminated under a compromise hatched in recent days between Christopher Dodd, chairman of the banking panel, and Sen. Richard Shelby, the panel’s top Republican.

The RAM mortgage cap was also eliminated in a version of the bill passed by the House of Representatives financial services panel, meaning it will likely be scrapped in the final version of the bill.

The House is scheduled to vote on FHA reform Tuesday and the Senate Banking committee on Wednesday.

In other elements of the compromise, FHA borrowers will have to offer a downpayment of at least 1.5 percent of the home value, and the loan limit will be equal to that imposed on Fannie Mae FNM.N and Freddie Mac FRE.N, which is currently $417,000, sources familiar with the negotiations said.

Today, FHA borrowers must offer 3 percent cash to quality for a loan so the new language would cut that requirement in half. Also, loans that exceed $362,000 are not FHA eligible under existing rules, which has effectively eliminated the program along the East and West Coasts.

In an official statement of policy released Monday, the White House said it would oppose any effort to lift the loan limit above the level Fannie and Freddie must abide. Still, several lawmakers have expressed support for just such a move.

Sen. Charles Schumer, the New York Democrat and member of the Senate Banking Committee, could float an amendment Wednesday that raises the loan limits and Rep. Barney Frank, chairman of the House Financial Services Committee, has said he will try to lift the FHA loan limit as high as $500,000 and give officials the power to raise the limit in times of severe market disruption when the bill is taken up tomorrow.

The FHA, which was set up in 1934 during the Depression and helps borrowers win favorable loan terms by guaranteeing mortgage payments to lenders, has traditionally been a resource for first-time homebuyers with low incomes.

But during the recent housing boom, many such borrowers turned to the easy loan terms of subprime mortgages.

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. Financial markets have been shaken in recent weeks as the number of failing mortgages, particularly subprime loans, has climbed.

About 200,000 troubled borrowers could win new mortgage terms if the FHA were modernized, according to the Department of Housing and Urban Development. Even without a new law, 80,000 troubled borrowers could save their homes in 2008 despite having missed some mortgage payments under a loosening of FHA rules announced by President George W. Bush late last month.

If reform measures pass both chambers, lawmakers will hammer out a compromise version of the bill to send to Bush for enactment.

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