November, 2007

Inspection News and Views from the American Society of Home Inspectors

Capitol Hill, ASHI Act on Subprime Mortgage Credit


Clearly, the revenues of ASHI members are linked to the ability of their customers to obtain mortgage financing. Federal policy affecting mortgage availability is crucial.     
In response to the subprime mortgage credit issue, members of Congress are currently considering policy responses that will affect whether and how many homebuyers, even those with pristine credit, will be able to obtain mortgages.       

Action surrounding the delicate and potentially volatile issue has reached a crescendo in recent weeks.  
In early September, ASHI issued a policy update on the dilemma to its membership. There is concern within the home sales industries that Congress may overreact and tighten mortgage lending criteria to the extent it would curtail the ability of large portions of the home-buying market to obtain financing. Other associations representing various sectors of the home sales industry have expressed similar concerns.

While ASHI acknowledges there are genuine problems in subprime mortgage lending to be addressed, ASHI has stated its recommendation that Capitol Hill act in a deliberative, thoughtful manner and not overreact with legislation that would unduly restrict access to mortgage credit even to those with good credit. Such an overreaction could further depress an already soft single-family housing market, with severe impacts on ASHI members. ASHI has conveyed these concerns to leading members of Congress in housing policy.  

Thus far, Congress has heeded the industry’s calls for thoughtful deliberation and has refrained from reacting in a crisis mentality. 

House passes Bill

On September 18, the House of Representatives passed HR1852, the “Expanding American Homeownership Act of 2007.” A statement issued by the House Financial Services Committee offered that HR1852 “will revitalize the Federal Housing Administration … to serve more subprime borrowers at affordable rates and terms, recapture borrowers that have turned to predatory loans in recent years, and offer refinancing loan opportunities to borrowers struggling to meet their mortgage payments in the midst of the current turbulent mortgage markets.”

Representative Barney Frank (D-Mass.), Chairman of the Committee, said of HR1852 that “a revitalized FHA program will help future homeowners realize the dream of homeownership, and will prevent many first-time and inexperienced homebuyers from being pushed into loans that are unaffordable or difficult to understand. The bill … will help people all across America because we have enacted provisions to allow the FHA to insure loans in high cost areas.”

Bill viewed as positive, moderate initial response

HR1852 is widely viewed as a positive, moderate initial response on subprime. The bill contains provisions of special interest to ASHI members whose customers rely on ready access to mortgage funding. The bill will 1) authorize zero and low downpayment loans for borrowers that can afford mortgage payments but lack the cash for a required downpayment; 2) double the current funding level for housing counseling; 3) direct FHA to provide mortgage loans to higher risk (but qualified) borrowers; 4) raise FHA single family loan limits; and 5) allow FHA to be a valid mortgage option in higher-cost home markets. 

In a clear effort to address skyrocketing mortgage defaults among subprime borrowers in a targeted manner, the bill directs FHA to make available refinancing loans to existing qualified home-owners who are in default or at risk of default due to rate resets or mortgage market conditions, and to authorize lower downpayments for such purposes.

The bulk of HR1852 was conceived before the problems in the subprime market became widely apparent. But it is a good timely vehicle for FHA modifications to help remedy the subprime mortgage lending issue without onerous credit-stifling provisions.     

With House passage of HR1852, the focus now shifts to the Senate.

Focus shifts to Senate

On September 20, the House Financial Services Committee held a hearing entitled “Legislative and Regulatory Options for Minimizing and Mitigating Mortgage Foreclosures.” Witnesses included the cardinals of U.S. credit and housing policy:  Secretary of the Treasury Henry Paulson, Federal Reserve Chairman Bernanke and Secretary of HUD Alphonso Jackson.  
During the day-long hearing, Chairman Frank repeated his concerns for the depth and breadth of the subprime mortgage lending problems and his willingness, perhaps desire, to enact sweeping legislation. 

However, Frank moderated his own call for legislation by observing the strong pressure from industry for Congress to “go slow” and allow the credit markets and the lending industry to make adjustments without a strong congressional reaction. 

Frank seemed to signal he might be willing to withhold final judgment on the need for comprehensive congressional action if the responses by Treasury, the Fed, HUD and the mortgage lending industry are substantial enough to remedy the problems.

Paulson, Bernanke and Jackson used much of their testimony to make the case that the markets and regulatory institutions are making the surgical changes needed, and that the lending industry and the markets are already self-correcting.

Bernanke said the Fed is working with national organizations to help borrowers avoid foreclosure. In addition, the Fed has issued guidance documents describing soundness and consumer protection standards for nontraditional mortgages. It has commenced a rigorous review of mortgage disclosure documents. It is scrutinizing policy on prepayment penalties, escrow accounts for taxes and insurance, stated-income and low-documentation lending, and the evaluation of a borrower’s ability to repay. It is implementing a pilot program to strengthen compliance reviews at selected lenders, evaluating underwriting standards and senior management oversight.  

Bernanke said that to alleviate foreclosures, the FHA could be encouraged to collaborate with the private sector to expedite the refinancing of creditworthy subprime borrowers facing large ARM resets. He noted that Fannie Mae and Freddie Mac are assisting in subprime refinancings and should be encouraged to provide products for subprime borrowers.

Chairman Frank did not divulge the action he plans to take based on the testimony, nor his view of the sufficiency of the market and regulatory responses thus far.  

ASHI continues to monitor

Recent reports on foreclosures and home sales indicate the subprime mortgage issue and its impact on home sales is far from over. ASHI will continue to monitor developments and propose action for the association as the legislative circumstances warrant.