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NAR RAISES CONCERNS OVER FHA; SUGGESTS WAYS TO KEEP PROGRAM SOUND

NAR RAISES CONCERNS OVER FHA; SUGGESTS WAYS TO KEEP PROGRAM SOUND
 WASHINGTON, April 3 /PRNewswire/ -- Recent reports on the financial soundness of the Federal Housing Administration's (FHA) single-family mortgage insurance fund appear to use overly pessimistic economic assumptions to build a case for stringent program tightening, according to a representative of the National Association of Realtors.
 NAR President Dorcas T. Helfant discussed the latest FHA actuarial status report and the fiscal 1991 audit, along with the impact of existing FHA restrictions, during a hearing today before the U.S. House housing subcommittee. The subcommittee is part of the House Banking Committee.
 Both the actuarial study and the audit, released in March, were prepared by the Price Waterhouse accounting firm for the U.S. Department of Housing and Urban Development (HUD), which oversees FHA. The studies focus on the soundness of the FHA's Mutual Mortgage Insurance Fund (MMIF), which covers lenders' claims filed against defaulted loans. The dire projections made for the economy and home appreciation resulted in an exaggeration of the risk of default on loans currently insured by FHA, as well as those it will insure in the future, Helfant said. "This led to a much more negative assessment of the economic value of the (MMI) fund than we feel is warranted," Helfant said.
 Helfant questioned the econometric model used in the actuarial study, which showed the economic value of the MMIF to be negative $2.7 billion. This is in stark contrast to the positive $2.6 billion reported last year by Price Waterhouse. The association has not been permitted access to the data Price Waterhouse used to prepare the model. However, NAR is "stunned" that by using only one more year of data, the model can generate such divergent results, Helfant said. "We are even more skeptical of HUD's heavy reliance on this untested model to make dramatic changes to FHA," she said.
 Last year, in a drastic attempt to build reserves for the MMIF, HUD imposed FHA restrictions that are making the program more costly for borrowers to use. Specifically, last July, the department limited the amount of closing costs that can be financed to 57 percent. The restriction has added hundreds of dollars to the out- of-pocket costs buyers must pay at settlement. It was made in addition to new limits on the amount FHA borrowers can finance, which were mandated by the National Affordable Housing Act of 1990. Now, HUD is attempting to justify retaining the closing cost restriction, based on the conclusions of the Price Waterhouse reports. However, rather than helping to improve FHA's fiscal strength, the change is causing FHA to lose business, Helfant explained. "Home buyers with no other financing alternatives have been shut out of FHA, and those who can afford other mortgage sources are turning to them. FHA is losing people at both ends," she said.
 According to NAR research, housing markets across the nation experienced a significant drop in FHA activity after HUD imposed the closing cost restriction in July. Between the first and second half of 1991, 62 areas reported falling FHA use, with the average decline exceeding 21 percent. "Clearly, FHA has become far less attractive as an insurer," she said.
 In addition to the higher costs, the closing cost restriction has had the unintentional effect of making FHA- insured financing cumbersome for consumers to obtain and lenders to originate, Helfant noted. "It is quicker, less labor intensive, and just generally easier to go conventional," Helfant said. Buyers who qualify for either FHA or conventional financing presumably would be considered low-risk borrowers who could offset some of the higher-risk borrowers using the program. Losing the low-risk borrower does not fulfill the goal of shoring up FHA, she noted.
 Rescinding the closing cost restriction would bring buyers back to FHA, and help it regain some of the market share it has lost, she said. Another measure that could substantially strengthen the program would be to change the FHA mortgage insurance loan limit to more accurately reflect local housing costs.
 FHA's maximum insurance limit, $124,875, has rendered the program virtually useless in areas where home prices typically are much higher. However, although this shortcoming has been heavily emphasized, the problem with FHA loan limits affects more than just the highest-cost areas, Helfant noted. In addition, families in less-expensive markets are being shut out of homeownership due to low FHA loan limits that have not kept pace with home price increases, she said.
 NAR has determined that the FHA limits now existing in individual markets are keeping approximately 4.7 million potential buyers from becoming homeowners. These are families who do not qualify to buy based on conventional loan terms, but who could buy using FHA financing if they were not barred by the program's loan limits. For instance, NAR research shows that in Boston, there are 317,205 families who likely would buy if they could use FHA. In New York, 1,079,899 families could, and likely would, buy with FHA if it were accessible. In San Antonio, the FHA limit is keeping 6,625 likely candidates from homeownership; and, in Eugene, Ore., 17,973 families have been locked out. "The only thing keeping them from buying is that the mortgage they need exceeds the FHA limit in their area," Helfant said. A closer link between the insurance limit and local prices would enable FHA to serve borrowers in more areas, bringing much-needed diversity to FHA's portfolio, she explained.
 Another way to strengthen FHA would be to change its mortgage insurance premium structure, Helfant suggested. Under a system in place since the mid-1980s, borrowers who prepay their FHA loans receive a refund of the premium paid to FHA at settlement. This has resulted in excessive refunding, cutting the MMIF reserves drastically. NAR believes FHA should revert back to the "pay-as-you- go" system it formerly used. The association supports charging a lower upfront premium that is non-refundable, along with an annual premium of 0.5 percent, she said.
 The National Association of Realtors, "The Voice for Real Estate," is the nation's largest trade association, representing more than 750,000 members involved in all aspects of the real estate industry.
 -0- 4/3/92
 /CONTACT: Trisha Morris, 202-383-7560, or Liz Duncan, 202-383-1043, both of the National Association of Realtors/ CO: National Association of Realtors ST: District of Columbia IN: SU:


MH -- DC014 -- 4858 04/03/92 13:20 EST
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Date:Apr 3, 1992
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