Republican lawmakers have drafted a proposal that would raise the minimum downpayment on Federal Housing Administration (FHA) loans to 5% and drastically scale back the size of the federal mortgage insurance program, according to trade group officials familiar with the effort.

A copy of the legislation, which was provided to National Mortgage News, is marked ‘Discussion Draft’ and does not list a sponsor. However, sources expect provisions of the bill to be discussed at a House Financial Services subcommittee hearing this Wednesday, May 25. Rep. Judy Biggert, R-Ill, chairs the subcommittee.

Besides raising the minimum downpayment requirement, the bill lowers the FHA loan limit in most areas of the country.

Currently, FHA will insure single-family loans anywhere in the nation on loan balances of up to $271,050. This is considered a “floor” but in high cost areas the agency will insure mortgages of up to $729,750.

According to the draft legislation, the floor would be lowered to 125% of the median home price, which now stands at $173,000. This reduction in the loan limit floor would go into effect six months after enactment of the bill.

In their draft, the GOP included certain provisions requested by Department of Housing and Urban Development (HUD) secretary Shaun Donovan that would strengthen FHA’s powers, including its ability to expel lenders from the program and to require indemnifications on loans that go bad.

Entitled the FHA-Rural Regulatory Improvement Act the draft bill also calls for rolling the Rural Housing Service loan guarantee program into FHA.

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