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Senate passes FHA modernization legislation.

A bill authored by Senate Banking Committee Chairman Christopher Dodd (D-Conn.) to increase the financing options for homeowners hit hard by the current foreclosure crisis and credit crunch in the mortgage market passed the Senate. The bill, S. 2338, the Federal Housing Administration Modernization Act, would reform the Federal Housing Administration (FHA) and provide it with the necessary authority to help a larger number of struggling homeowners avoid foreclosures.

A similar FHA modernization bill (H.R. 1852) passed the House in September. The President urged Congress to pass an FHA modernization bill quickly to stem the rising number of home foreclosures. Although House and Senate leaders were initially optimistic FHA reform could be sent to the President prior to the end of the session, wide differences remain between the Senate and House bills.

FHA encourages lenders to provide loans to homebuyers with riskier credit by making insurance available on the loan.

FHA insurance protects lenders against loss if homeowners default on FHA-backed loans. FHA loans are limited to a certain size mortgage, however, making them unavailable to families living in high-cost housing areas. Moreover, FHA loans are largely unavailable for homeowners with poor credit histories, such as those who have defaulted on housing payments due to interest rate increases built into the subprime loans that are driving the current foreclosure crisis.

Both the Senate and House bills aim to modernize FHA rules and policies to reflect changes and innovations in the mortgage finance system.

Among the differences between the bills that will need to be resolved early next year are the maximum size of a home loan that can be FHA-insured, downpayment requirements for homebuyers and funding for an affordable housing program.

Under current rules, the maximum loan FHA can insure is the lesser of 95 percent of an area's median house prices or a base limit of $362,000. Homebuyers riving in cities where the average home costs more than $362,000 are effectively shut out of the FHA program. The House bill would increase FHA loan limits to 125 percent of an area's median house price. The Senate bill offers a more modest increase of 100 percent of an areas median house price.

In addition, the House bill offers zero-downpayment loans, while the Senate bill lowers downpayment requirements to 1.5 percent. Finally, the House bill would draw on a percentage of FHA profits to fund a National Affordable Housing Trust Fund (AHTF).The Senate bill does not include funding for an AHTF.

House Financial Services Committee Chairman Barney Frank (D-Mass.), who sponsored NLC-supported legislation to create a National Affordable Housing Trust Fund (H.R. 2895), has indicated he is wilting to fight for AHTF funding in the FHA bill. Sen. John Kerry (D-Mass.) recently bolstered Frank's position by introducing companion AHTF legislation (S. 2523) in the Senate late last week. However, the President has ,threatened the possibility of a veto if the FHA modernization bill retains the higher loan limits and trust fund provisions from the House bill.

Tax Penalty Eliminated for Families Losing Homes to Foreclosure

The final housing-related bill to pass Congress prior to the yearend recess would eliminate a tax penalty on families that lose their homes to foreclosure.

Currently, if the sale of a foreclosed home fails to pay off the homeowner's existing mortgage debt, the portion of the debt not covered by the sale is typically forgiven. However, the IRS views the forgiven portion as income subject to federal taxes. The bill, H.R. 3648, the Mortgage Forgiveness Debt Relief Act, will suspend taxes owed on canceled mortgage debt until 2010. The President is expected to sign the bill into law.
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Author:Wallace, Mike
Publication:Nation's Cities Weekly
Date:Dec 24, 2007
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