House votes to overhaul the FHA

washington -- The U.S. House of Representatives voted Tuesday to overhaul the Federal Housing Administration and allow the mortgage insurance program to help more homeowners in danger of losing their homes.

The FHA, set up in 1934 during the Depression, was designed to help first-time home buyers win favorable loan terms by guaranteeing mortgage payments to lenders.

The new legislation would broaden underwriting standards so that current homeowners could refinance before they lose their homes.

Lawmakers passed it by a vote of 348 to 72. The Senate Banking Committee is due to vote today on its version of the legislation.

If the full Senate passes the bill, lawmakers from both chambers will meet to draft compromise language for consideration by President Bush.

Although the Bush administration has spoken in favor of overhauling the FHA, it has opposed some calls to raise the value of loans that can be insured by the program.

Fannie Mae and Freddie Mac, two major government-sponsored mortgage funders, can invest in loans of $417,000 or less. The Bush administration supports raising the FHA loan limit to that level but no higher.

The legislation passed by the House on Tuesday would allow for the loan cap to reach $829,750 in some circumstances.

Under existing rules, loans that exceed $362,000 are not FHA eligible, which has effectively eliminated the program along the East and West coasts.

Although the program has traditionally been a resource for low-income first-time home buyers, many turned to the easy loan terms of sub-prime mortgages during the recent housing boom.

The FHA share of new mortgages slipped from 9.1% to 1.8% from 1996 to 2006, according to industry publication Inside Mortgage Finance.

Financial markets have been shaken in recent weeks as the number of failing mortgages, particularly sub-prime loans, has climbed.

About 200,000 troubled borrowers could win new mortgage terms if the FHA were modernized, according to the Department of Housing and Urban Development. Even without a new law, 80,000 troubled borrowers could save their homes in 2008 despite having missed some mortgage payments under a loosening of FHA rules announced by President Bush late last month.

“We have just about reached our limit under our present authority. . . . Without modernization, FHA simply cannot do much more,” Brian Montgomery, the FHA commissioner, said after the vote Tuesday.