The Alley-Oop Pass to FHA Loans, Perhaps

In light of the growing fallout in the subprime mortgage market, this could be the year the long-suffering Federal Housing Administration gets its much-needed makeover.

Unfortunately, though, it’s taking a brutal financial climate for some homeowners to trigger an increased push for modernization legislation. Despite that nasty climate, legislation now making its way through Congress that would revamp the FHA and its mortgage programs is still far from a sure thing.

Legislation that would overhaul and modernize the FHA recently met with approval in the House Financial Services Committee, and the entire House will likely vote on the measure sometime in June. Passage there would send the measure onto the Senate, which killed a similar legislative measure last year.

Some observers believe the disastrous climate surrounding the subprime crisis makes the legislation a no-brainer. Overall, about one in five people who obtained subprime mortgages in the last two years will wind up in foreclosure, according to the Center for Responsible Lending, a nonprofit advocacy group.

More than a half-million borrowers have lost their homes in the subprime market, and industry experts project that another 2 million or so are likely to meet a similar fate as the subprime crisis spirals.

A revamped and modernized FHA could help those borrowers recapture their financial futures through the administration’s government-backed loans and refinance programs. But nationally syndicated real estate columnist Kenneth R. Harvey pointed to a few spots where the pending legislation could snag, including a provision that would divert new revenues created by a bigger FHA for homeowner counseling, technological improvements or use in an “affordable housing fund,” according to Harvey’s column.

He also notes that private mortgage groups have a keen interest in keeping this legislation from hitting the books.

Despite those possible obstacles, Harvey says the legislation has a decent shot at full passage.

“Bottom line for reform: Slam dunk? No way. But the bill has a shot — either in its current form or by having essential provisions transplanted into an appropriations bill that can sidestep the land mines buried and waiting in the Senate — without blowing up,” he writes.