Your Mortgage : Drive for ‘Kinder’ FHA Rules Gains Allies : Financing: Consumers Union joins opposition to Kemp’s plan to raise cash requirements for popular home loan program.

Opposition to the Bush Administration’s proposed hikes in “user fees” for many borrowers who use the popular FHA loan program has gathered more steam.

Consumers Union, which has successfully lobbied in the past for regulatory changes that have benefited borrowers, has joined realty trade groups in backing a proposal that they say would be “kinder and gentler” to thousands of the nation’s would-be home buyers.

The consumer advocacy group has joined the powerful National Assn. of Realtors and the National Assn. of Home Builders in support of a competing FHA revision plan offered by Reps. Bruce F. Vento (D-Minn.) and Thomas J. Ridge (R-Pa.)

The Administration, Congress, Consumers Union and the trade groups all agree that changes in the FHA program are needed to keep it financially sound into the next century.

However, exactly how the program should be shored up has sparked heated debate on Capitol Hill.

Last month, Jack Kemp--head of the U.S. Housing and Urban Development Department, which operates the FHA program--proposed a sharp increase in fees that many borrowers under the popular loan program must pay.

Although the primary FHA fund had a net worth of $2.6 billion at the end of the latest fiscal year, Kemp said it will have “a negative net worth unless something is done” to stem the growing number of foreclosure losses.

Borrowers who make big down payments are less likely to default, HUD analysts say, because they stand to lose more if they eventually fall into foreclosure.

As a result, Kemp wants to require borrowers who make a down payment of less than 10% of the purchase price of the home to pay a one-half of 1% “risk premium” on top of the 3.8% insurance premium they already pay to use the program.

That proposal would add about $40 to the monthly payment on a $100,000 loan at 10%, according to the National Assn. of Realtors.

The Kemp plan also would require that borrowers pay two-thirds of their closing costs in cash, raising the amount of up-front money needed to get a $100,000 loan by about $1,266. Currently, most closing costs can be paid off over the life of the loan.

HUD estimates that 35,000 Americans will immediately be knocked out of the housing market if the Kemp plan is approved, largely because they don’t have the extra $1,000 or $2,000 in up-front cash that borrowers would need under the revised guidelines.

Realtors and builders say the number of locked-out buyers will be much higher--perhaps as many as 250,000 a year.

“The Administration’s plan would deal a fatal blow to people who need the FHA program the most--the people who don’t have the money it takes to make a big down payment,” said Norman D. Flynn, a real estate broker and president of the National Assn. of Realtors.

Realtors, builders and the Consumers Union say that the Vento-Ridge plan would give the FHA the financial cushion it needs while, at the same time, continue to keep the program open to cash-strapped borrowers in California and across the nation.

Under the Vento-Ridge proposal, FHA buyers would pay a non-refundable fee equal to 1.35% of the total loan amount. The fee wouldn’t have to be paid in cash: Instead, it could be paid through monthly installments over the life of the loan.

In addition, FHA buyers would have to pay an annual “renewal fee” equal to one-sixth of 1% of the total loan amount.

Although the formula for calculating FHA fees under the Vento-Ridge plan is complex and phased in over five years, the National Assn. of Realtors provides an example of how an FHA borrower who buys a $100,000 house or condominium would be affected:

* Under current rules, the typical borrower would make a $4,600 cash down payment and pay another $2,000 for various up-front closing costs. Another $5,701 in closing costs and mortgage insurance premiums would be paid off through monthly installments. Total up-front costs to move in: $6,600.

* The Kemp plan would require an extra $1,266 in cash--for a total of $7,866 up front--to close the deal. The difference is largely caused by Kemp’s proposal to make FHA buyers put up two-thirds of their closing costs in cash rather than paying those costs over the life of the loan.

* The Vento-Ridge proposal would keep the typical FHA buyer’s up-front costs at $6,600. Although it would require borrowers to pay a bit more in mortgage insurance premiums over the life of the loan, their monthly payments wouldn’t be much different than the current program demands because it would add only 1.35% to their total loan amount to cover their mortgage insurance premiums instead of the 3.8% premium that the current guidelines demand.

“The Vento-Ridge proposal would keep the FHA program open to people with small down payments and make the program a true ‘pay-as-you-go’ system,” said Michelle Meier, an executive and lobbyist with Consumers Union. “It’s a lot kinder and gentler to borrowers than the Administration’s plan.”

Thanks in part to the backing of Consumers Union, about 100 House members have already thrown their support to the Vento-Ridge proposal. If the measure is approved, a compromise will have to be worked out between members of the House and the Senate.

The Senate approved the Kemp plan by an overwhelming majority last month.

Any changes to the current FHA program probably wouldn’t take effect until next year.

“We don’t know what the end result will be,” realtor Flynn said.

“But one thing seems certain: Some big changes are going to be made to the FHA program. If you’ve been thinking about getting an FHA loan, you might want to get off the fence and get it before it’s too late.”

NEXT STEP

Look for the House of Representatives to propose “kinder and gentler” changes to the FHA program than those already approved by the Senate. Changes probably won’t become effective until next year. The bottom line, though, is that many borrowers will probably have to pay more to use the program.

AVERAGE RATES FOR RESIDENTIAL MORTGAGES Average rates for residential mortgages as of July 20, 1990.

Survey Conventional Mortgages Adjustable Mortgages Area 15 Year 30 Year Composite 1 Year Composite National 9.81% 10.06% 9.95% 8.32% 8.61% California 10.06 10.30 10.18 8.56 8.46 Connecticut 9.89 10.11 10.02 8.45 8.64 Wash. D.C. 9.68 9.96 9.83 7.99 8.37 Florida 9.84 10.11 9.98 8.33 8.42 Mass. 9.82 10.12 9.99 8.49 8.75 New Jersey 9.80 10.04 9.94 8.21 8.64 N.Y. Metro 9.89 10.13 10.03 8.39 8.72 New York 10.00 10.23 10.13 8.51 8.82 N.Y. Co-ops 10.27 10.36 10.36 8.60 8.88 Pa. 9.53 9.81 9.69 8.00 8.13 Texas 9.56 9.83 9.70 8.19 8.33

SOURCE: HSH Associates, Butler, N.J.