FHA Reform and Fed Rate Cut - What does all this mean?

Two important things happened today - H.R. 1852 passed in Congress and the Federal Reserve cut interest rates.

Both of these actions may positively impact the housing market by easing pressure on the mortgage industry and, more importantly, soothing jittery consumers.

HR 1852, "The Expanding American Homeownership Act", is a much-needed reform to the FHA program.  This bill modernizes and updates the National Housing Act and enables the Federal Housing Administration to use risk-based pricing to more effectively reach underserved borrowers, and allows millions more low- and moderate-income families to achieve the American dream of homeownership.

Here's what it does:

1. Reduces barriers to homeownership by eliminating the current statutory three percent minimum down payment.  FHA's existing down payment requirement does not meet the demands of today's marketplace, where most first-time homebuyers put down two percent or less. The "new" FHA offers a variety of down payment options.
2. Creates a new, risk-based insurance premium structure for FHA that would match the premium amount with the credit profile of the borrower. It replaces the current structure, in which there is standard premium amount for all borrowers, while still protecting the soundness of its Insurance Fund. FHA will now  have the flexibility to charge a lower premium for low-risk borrowers, and to charge higher-risk borrowers a slightly higher premium.
3. Increases and simplifies FHA's loan limits. FHA's loan limit in high-cost areas will rise from 87 to 100 percent of the GSE conforming loan limit and in lower-cost areas from 48 to 65 percent of the conforming loan limit. This change is crucial in today's housing market. In many areas of the country, the existing FHA limits are lower than the cost of new construction, eliminating FHA financing as an option for buyers of new homes in those markets. FHA has simply been priced out of the market in other areas, such as California, where FHA insured only about 5,000 home mortgages in all of 2005, down 95 percent from 109,000 in 2000.

Hallelujah - A Rate Cut

For the first time since June 2003, the Federal Reserve voted to cut the fed funds rate by a half-percentage point to 4.75 percent. The Fed also cut the discount rate for the second time in a little over the month, lowering the rate by a half-percentage point.

The fed funds rate, which determines consumer loans, had remained at 5.25 percent for more than a year, as the Fed tried to balance inflationary pressure with the threat of an economic slowdown triggered by the collapse of the housing market.

The Fed's statement was that they intended to "help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time."

My hope is that these two very significant actions will have a combined positive effect on consumers, on the housing sector, and on the broader economy.