Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, July 29, 1990 TAG: 9007300280
SECTION: HOMES PAGE: B-1 EDITION: METRO
SOURCE: SANDRA BROWN KELLY HOMES EDITOR
DATELINE: LENGTH: Long
The proposal last month from Jack Kemp - head of the U.S. Housing and Urban Development Department, which operates the FHA program - called for a sharp increase in fees that many FHA borrowers must pay.
For the average FHA loan in the Roanoke Valley, it would mean a increase of more than $700 in upfront costs and $25 a month in payments, said Mike Hincker, president of the Roanoke Valley Mortgage Bankers Association.
The mortgage bankers and other trade groups, including the Roanoke Valley Association of Realtors and Roanoke Regional Home Builders Association, support an alternate FHA revision plan offered by Reps. Bruce F. Vento, D-Minn., and Thomas J. Ridge, R-Pa.
The housing groups are in agreement that changes in the FHA program are needed to keep it financially sound. What the changes should be, however, is sparking heated debate on Capitol Hill and has sent the associations' groups scurrying to legislators.
Pat Hutchens, president of the Roanoke realty group, said the realty group talked with Rep. Jim Olin, D-Roanoke, about its fears that Kemp's plan is not readily understood.
"We have heard from a vast number of Realtors. It's become a much bigger issue than I would have originally thought it was," said Gary Hanson, legislative aide to the congressman.
Although the primary FHA fund had a net worth of $2.6 billion at the end of the latest fiscal year, Kemp said it will have "a negative net worth unless something is done" to stem the growing number of foreclosure losses.
Borrowers who make big down payments are less likely to default, HUD analysts say, because they stand to lose more if they eventually fall into foreclosure.
As a result, Kemp wants to require borrowers who make a down payment of less than 10 percent of the purchase price of the home to pay a one-half of 1 percent "risk premium" on top of the 3.8 percent insurance premium they already pay to use the program.
That proposal would add about $25 to the monthly payment on a $60,000 loan at 10 percent, according to Hincker. The ceiling for FHA loans in the Roanoke Valley is $93,750 and the average FHA loan is $60,000, he said.
Forty percent of the mortgage loans made in the Roanoke Valley are FHA loans, Hutchens said, and the bulk of those are to entry-level buyers who often have a limited amount of cash.
The Kemp plan would require that borrowers pay two-thirds of their closing costs in cash, raising the amount of upfront money needed to get a $60,000 loan by about $759. Currently, most closing costs can be paid off over the life of the loan.
HUD estimates that 35,000 Americans will immediately be knocked out of the housing market if the Kemp plan is approved. Realtors and builders say the number of locked-out buyers will be much higher.
Under the Vento-Ridge proposal, FHA buyers would pay a non-refundable fee equal to 1.35 percent of the total loan amount. The fee wouldn't have to be paid in cash, but could be paid through monthly installments over the life of the loan.
In addition, FHA buyers would have to pay an annual "renewal fee" equal to one-sixth of 1 percent of the total loan amount.
Legislative assistant Hanson said Olin had him research the issue in detail and the results of that research left Olin concerned about both proposals.
"His last concern was that the Kemp proposal might have been too harsh and go too far and that the Vento-Ridge might be too soft and not go far enough," said Hanson. "It's one of those complicated things where Jim is very concerned to not have another government-backed program get in trouble."
Hanson said he understood that the Vento-Ridge proposal was being reworked, but he did not know if the changes would satisfy Olin's concerns.
Although calculating FHA fees under the Vento-Ridge plan is complex and phased in over five years, Hincker calculated this example of how an FHA borrower who gets a $60,000 loan could be affected:
Under current rules, the typical borrower in the Roanoke Valley makes a $2,600 cash down payment and pays another $800 for various upfront closing costs. Another $4,080 in closing costs and mortgage insurance premiums would be paid off through monthly installments. Total upfront costs to move in: $3,390.
The Kemp plan would require an extra $759 in cash - for a total of $4,049 up front - to close the deal. The difference is largely caused by Kemp's proposal to make FHA buyers put up two-thirds of their closing costs in cash rather than paying those costs over the life of the loan.
The Vento-Ridge proposal would keep the typical FHA buyer's upfront costs at $3,390. Although it would require borrowers to pay a bit more in mortgage insurance premiums over the life of the loan, their monthly payments wouldn't be much different from the current program demands because it would add only 1.35 percent to their total loan amount to cover their mortgage insurance premiums instead of the 3.8 percent premium that the current guidelines and the Kemp plan would demand of most borrowers.
Any changes to the current FHA program probably wouldn't take effect until next year.
The Los Angeles Times News Service contributed to this story.
by CNB