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Senate Passes Home Loan Reform Bill

Legislation would help borrowers refinance into government loans

By Martin H. Bosworth
ConsumerAffairs.com

December 15, 2007

he Senate voted 93-1 to support lowering the down payments for FHA-backed loans from 3 percent to 1.5 percent. The legislation would also raise the limit on mortgages that could be backed by the FHA, from $362,000 to $417,000.

The loan limit raises were designed to target beleaguered borrowers in states with high real estate prices, such as California and New York, where "jumbo" mortgages beyond FHA limits comprise large parts of the faltering housing market.

"It was past time to approve a proposal like this that can help a good number of Americans save their homes," said Sen. Charles Schumer (D-NY). "This is a good first step in the larger effort to bring relief to distressed homeowners trapped in the mortgage mess."

FHA loans have been a traditional staple for first-time homebuyers since their creation in 1934, but fell out of favor with the advent of the subprime lending industry, that promised flexible lower payments and little or no money down for their products.

But with the subprime mortgage industry now moribund due to massive defaults on loans and slowing home sales, FHA loans have come back into vogue, leading to the push to modernize their terms in order for more borrowers to qualify.

The Senate bill must be reconciled with a similar bill in the House of Representatives which offers higher loan limits for FHA-backed mortgages, and more flexible payment terms for borrowers.

The Bush administration has voiced support for raising the FHA loan limits, but it opposes the limits set in the House bill.

The Senate bill was sponsored by Sen. Christopher Dodd (D-CT), who has also introduced legislation designed to combat predatory lending abuses and reform bankruptcy rules that would enable homeowners declaring bankruptcy to protect their homes.

Bush plan

The Bush adminstration is supporting a plan championed by Treasury Secretary Henry Paulson that would enable homeowners trapped by rising mortgage payments or bad loan terms to qualify for a "loan freeze" from their lender for five years.

The plan relies on voluntary cooperation from the financial and lending industries, and has been characterized as a "bailout" by Wall Street, while consumer advocates criticized the plan for not doing enough to help homeowners already falling behind on their mortgage payments.

Industry insiders say that the Bush plan's chief objective is to scuttle legislative attempts for stronger measures for homeowner protection, including the bankruptcy reform bills but Wall Street opposes the measure because it could affect the earnings of wealthy investors.

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