Legislation to shore up the financial stability of the Federal Housing Administration (FHA) by allowing the agency to better manage its risk and to raise more money was approved by the House Financial Services Committee on April 27.

H.R. 5702, the FHA Reform Act of 2010, would enable the FHA to improve its financial position by adjusting its premium structure for new borrowers and shifting some of the upfront cost to the annual premium.

Specifically, the bill would allow the FHA to increase the annual mortgage insurance premium (MIP) from 0.55% to 1.55% for borrowers who make less than a 5% downpayment.

While the FHA is only expected to increase the annual premium to between 0.85% and 0.95%, this additional flexibility will allow the agency to reduce the up-front MIP that was increased to 2.25% earlier this month. Shifting some of the increase from the up-front to the annual premium will reduce the impact on the consumer.

In addition, the measure provides the FHA with enhanced authority to terminate lenders’ approval to originate or underwrite loans backed by FHA insurance when the agency finds evidence of fraud or noncompliance.

The legislation is intended to boost the FHA’s capital reserves, which have recently fallen below the 2% threshold required by law.

NAHB supports these efforts to strengthen the FHA’s finances.

Before the panel considered the measure, NAHB — along with the Mortgage Bankers Association of America and the National Association of Realtors® — sent a letter to committee members urging them to oppose amendments offered by Rep. Scott Garrett (R-N.J.) mandating higher downpayments on FHA loans, of up to 5% in some cases, and prohibiting the agency from financing closing costs.

“This is not the time to make unnecessary steps to a program that is serving such a vital function in our housing finance system,” the letter said. “We urge you to oppose any amendments to increase FHA’s downpayment requirement.”

The panel ultimately rejected all of Garrett’s amendments to raise downpayment requirements.

The FHA currently requires a minimum downpayment of 3.5% of the purchase price.

To view the legislation, click here and type H.R. 5702 in the box at the center of the page.

For more information, e-mail Scott Meyer at NAHB, or call him at 800-368-5242 x8144.