New efforts to reinvigorate FHA

The Bush administration moved after the President's State of the Union address, which only briefly touched on housing in the context of rebuilding the New Orleans area, to re-introduce FHA proposals that would make more people eligible for insured mortgages.

Possibly the most fundamental proposed change would see the FHA pricing insurance premiums according to risk. Premiums would be based on borrowers' credit scores and the amount and source of the downpayment, the administration's budget analysis said. Currently, premiums paid by higher credit-score homeowners subsidize those for lower credit scores.

The proposal would also allow the FHA to underwrite 100 percent of a home's purchase price and closing costs for borrowers with strong credit. Shakier credit borrowers could see initially higher insurance premiums decline as they made regular payments on time under a second proposal.

During the recent housing boom, the FHA's share of mortgages has steadily declined as lenders have relaxed credit standards and more creative subprime loans have been sold to lower credit-score consumers. Efforts to revive the agency's role in the mortgage market are a positive for appraisers, since FHA loans require a full appraisal.

In a more under-the-radar move to eliminate barriers to using FHA, HUD has rescinded its requirement of fixed itemized closing costs. In a Mortgagee Letter dated January 27, the agency said the move was "part of FHA's efforts to align its business process with industry practice."

Inflexible pricing did not account for differences in geographic markets, HUD acknowledged. It cautioned that FHA will still not allow "markups," that is, only the actual cost of the inspection or other service may b charged to the borrower.

"FHA believes that by no longer prescribing borrower's paid closing costs, a significant impediment to the use of its programs has been eliminated," the agency said.