Lawmakers are optimistic about a new bill that would expand the reach of the Federal Housing Committee, an organization that strives to provide safe loan alternatives to subprime mortgages and make homeownership more accessible. This bill is supposed to pass through both chambers of Congress by early April.  

Different versions of this modernization bill passed in Congress last year and both Senate Banking Committee Chairman Christopher Dodd, D-Conn., and House Financial Services Chairman Barney Frank, D-Mass., believe that any differences between the chambers could be quickly resolved.  

“I think we’re fairly close to having an FHA reform bill that we will be able to adopt very quickly,” said Dodd on the Senate floor.  

The FHA program is intended for mortgage borrowers with weak credit or limited cash who may not be able to otherwise obtain an affordable mortgage. Borrowers get FHA loans from private lenders just as they would any other mortgage, but they pay a small premium to the FHA each month. In turn, the FHA uses those premiums to cover the lender in the event of foreclosure and requires lenders to find viable ways to help borrowers avoid foreclosure should they become delinquent. Borrowers are given a better chance of keeping their homes should they fall on hard times. If a lender does have to foreclose, the FHA will pay the lender the unpaid loan principal, forgone interest and a portion of the foreclosure costs. FHA loans typically have better rates than other subprime mortgages and also do not carry prepayment penalties.  

Since most FHA mortgages are 30-year fixed rate loans, the lender won’t make any loan unless he has proof the borrower will be able to make each monthly payment. One of the causes of the “subprime mess” is that lenders didn’t typically require proof that borrowers could make their payments or only required that they could make payments at the low initial rate of an adjustable-rate mortgage.  

Taxpayer dollars do not directly support the FHA loan insurance program but the premiums paid by homeowners with FHA loans do. Taxpayers could, however end up paying more if too many FHA loans fail.  

Lawmakers have been working on reform legislation for the FHA in an attempt to modernize its standards so that they reflect changes to the housing market in the past 30 years. To do this, lawmakers will permanently raise loan limits, reduce down payment requirements, and make it easier for borrowers in high-cost loans to refinance.  

Though FHA loans are intended to help low- and moderate-income families who may not have other loan options, anyone can get an FHA-insured loan if they meat the eligibility requirements. For those who are capable of putting 20% down on a home and have very good credit might get a better deal with another type of mortgage product that doesn’t include insurance premiums. 

FHA modernization is welcomed by both community advocates and politicians, but lawmakers caution that reform is not the last word on easing the strains brought about by the subprime crisis. Janis Bowdler, a senior housing policy analyst of National Council of La Raza (a Latino civil rights and advocacy group) says, “My concern is that this will be seen as a panacea to the current foreclosure crisis. It’s really not. It’s one good tool going forward.”