Your Mortgage : Move to Tighten FHA Regulations Rapped : Home loans: Kemp wants buyers to come up with greater amounts of cash.

Thousands of would-be homebuyers hoping to use the popular FHA loan program recently got a double dose of bad news.

First, Jack Kemp--head of the U.S. Housing and Urban Development Department, which operates the FHA program--proposed an increase in fees that many borrowers must pay. He also said home buyers should have to put up more cash if they want to get an FHA loan.

At the same time, a coalition of private mortgage insurers, community activists and some lenders said they’ll oppose any future increases in the amount of money that home buyers can borrow under the FHA program.

The maximum amount that FHA borrowers can currently get is $124,875. That ceiling makes the program virtually unusable in many parts of high-cost housing states, such as California, New York and Massachusetts.

One of the main attractions of the FHA program has long been that borrowers could get a loan with a down payment of about 5%.

The Kemp plan would make low-down-payment FHA loans far more expensive.

Under his proposal, borrowers who make a down payment of less than 10% of the purchase price of the home would have to pay a one-half of 1% “risk premium” on top of the 3.8% insurance premium that they already pay.

In addition, the Kemp plan would no longer allow FHA borrowers to roll all of their closing costs into their loan amount to reduce the amount of cash they must have to buy a home.

Instead, two-thirds of the borrower’s closing costs would have to be in “hard cash”--a change that would require many borrowers under the program to have thousands of dollars extra in order to get an FHA loan.

Importantly, Kemp also hinted that he’ll oppose any future increases in the size of the loans that FHA borrowers can obtain. Some congressional representatives have suggested raising the current limit of $124,875 so that more people in high-cost housing states can use the FHA program.

Here’s how the Kemp plan would affect a borrower seeking an FHA loan of about $124,875, according to the Mortgage Bankers Assn. of America:

Under current FHA guidelines, the buyer would need about $9,300 in cash to make a 5% down payment and pay his closing costs. The mortgage-insurance premium over the life of the loan would be an additional $4,737.

If Kemp’s plan is enacted, that borrower would need $12,230 in cash to make the down payment and pay closing costs. His mortgage insurance premiums over the life of the loan would be doubled, $9,039.

Kemp called for changes in the FHA program in testimony before the Senate subcommittee on housing and urban affairs.

By conservative estimates, FHA is expected to lose $208 million this year. Less optimistic projections say it could lose as much as $667 million.

The FHA fund has been particularly hard-hit by bad loans in the Oil Patch states such as Texas and Oklahoma. As home prices there plunged over the past several years, thousands of FHA borrowers defaulted on their loans and subsequently cost the government millions of dollars in losses.

Although the primary FHA fund had a net worth of $2.6 billion at the end of fiscal 1989, Kemp said it will have “a negative net worth unless something is done.”

HUD analysts estimate that, if Kemp’s plans are enacted, about 35,000 borrowers will be made ineligible for FHA loans this year.

The powerful National Assn. of Realtors rejects those estimates, saying that at least 75,000 people and perhaps has many 150,000 would no longer be eligible for an FHA loan if the Kemp plan is enacted.

Thousands of those locked-out borrowers would be in California.

“Secretary Kemp’s remarks illustrate a troubling lack of support for housing at the federal level at a time when an increasing number of families in California and throughout the United States cannot obtain decent and affordable housing,” said Jim Antt Jr., a Bakersfield broker and president of the California Assn. of Realtors.

The Mortgage Bankers Assn. of America, a trade group that represents many lenders who make FHA loans, has joined the realtors in opposing Kemp’s sweeping changes to the FHA loan program.

The Kemp proposal has also drawn fire from the National Assn. of Home Builders, a big trade group that maintains that the FHA program is a vital tool that allows thousands of Americans to buy their first home every year.

Backing Kemp is the Mortgage Insurance Cos. of America, a trade group that represents private-sector mortgage insurers who essentially compete with the FHA for business.

Some financial institutions that don’t make many FHA loans are also supporting Kemp, saying that the growth of the agency over the past several years is squeezing out private-sector lenders.

And in an ironic twist, the Chicago-based National Training and Information Center--a nonprofit group that has long supported the FHA program--is also throwing its support behind the Kemp plan.

The NTIC maintains that expansion of the FHA program, including an increase in the amount of money that home buyers can borrow, would encourage lenders to make more big loans to relatively wealthy borrowers and make small-sized loans for poorer people even harder to get.

“Lenders don’t like to make small FHA loans because they can make a lot more money by making larger loans,” Tom Schraw, the center’s housing coordinator, recently told journalists at the annual convention of the National Assn. of Real Estate Editors.

“If the FHA limits are raised even higher, you’ll see even more lenders cater to the well-off, and you’ll see them continue to discriminate against people who only need a $40,000 or $50,000 loan.”

Ronnie J. Wynn, an Alabama lender and president of the Mortgage Bankers Assn., disputes Schraw’s concerns.

Wynn said that raising the amount of cash that FHA borrowers must pay up-front will knockthousands of first-time buyers out of the nation’s housing market.

He also said that the ceiling on FHA loans should be raised to make the program more viable in high-cost housing areas.

“With the (current) $124,875 limit, the FHA program just isn’t of much use to people in Los Angeles, New York, San Francisco and a lot of other parts of the country,” Wynn said. “You just can’t buy much in those areas with a $124,875 loan.

“There’s no reason why a schoolteacher in Alabama should be able to use the FHA program, but that a schoolteacher in L.A. can’t because the loan limits aren’t high enough,” Wynn said.

“There ought to be a level playing field for all borrowers, and right now the playing field just isn’t level.”