The House of Representatives is expected to vote on and pass legislation next week giving the Federal Housing Administration (FHA) more flexibility in adjusting mortgage insurance premiums and tools to rebuild its capital reserves.

The FHA reform bill (H.R. 5072) also strengthens the agency's hand in getting lenders to indemnify the agency against bad loans and to terminate lenders with excessive early defaults. The House Financial Services Committee approved the bill by a voice vote in April after rejecting (by a 52-12 vote) an amendment by Rep. Scott Garrett, R-N.J., to increase the FHA's 3.5% minimum downpayment to 5%.

Getting the FHA reform bill through the Senate could be tougher. Sen. Richard Shelby, R-Ala., has tried several times to increase the FHA minimum downpayment to 5%. He likely will try again.

The Senate is not expected to take up the FHA reform bill until after the July 4th recess, according to sources.

If passed in its current form, H.R. 5072 would allow FHA to reduce its 2.25% upfront premium to 1% and raise its 55 basis point annual premium to 85 bps on single-family mortgages with loan-to-value ratios up to 95% and to 90 bps for LTVs above 95%.

FHA officials estimate this change would increase the agency's reserve fund by $300 million a month.

In other FHA news, the former head of the FHA questioned the ability of the agency to continue its role as the bulwark of the mortgage market for much longer without an infusion of cash and staff. 

Brian Montgomery, who was FHA commissioner in the last Bush Administration, stopped short of predicting the agency's antiquated technology systems would eventually crash under the weight of insuring almost one-third of all residential loans. But he told the National Association of Real Estate Editors' annual conference in Austin that the agency wouldn't be able to keep pace with its lender-partners unless its computer systems are brought up to date and it can add much-needed new hires.

Montgomery told NAREE that the FHA is running on a patchwork of 37 computer systems, "some of which are over 30-years-old." He also pointed out that while Fannie Mae has grown by something like 1,000 employees since it was taken into receivership by the government and still has more than 500 vacancies, the FHA is "still the same size it was" when he headed the agency and it had only a 3% market share.

The former commissioner said at worst, the FHA and Ginnie Mae should be allowed to keep a portion of the revenues they generate so they can upgrade themselves.

"Even if they kept only $100-$200 million of the $6.3 billion in receipts they turn over to the Treasury, they could update their systems and add staff," he said. But ideally, he added, the two should be allowed to become separate, autonomous government agencies.

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