Potential homebuyers who were eying an FHA mortgage got a big lump of coal in their stocking this Christmas, courtesy of Congress.

The newly passed 2015 omnibus appropriations bills, which funds the federal government through next September, omits any spending to operate the FHA's Homeowners Armed with Knowledge program (HAWK). The pilot project, announced last spring, would have significantly reduced the fees charged on FHA mortgages for borrowers who received housing education and counseling as part of obtaining their loan.

FHA officials expressed dismay over the program being put on hold.

"Over the last few years FHA has proposed a number of steps to better serve borrowers and lenders in an ongoing effort to expand credit access and ultimately continue moving the economy in a positive direction," said Biniam Gebre, Acting FHA Commissioner and Assistant Secretary for Housing. "We are disappointed programs that could have served many families will not be permitted under the bill."

Would have reduced mortgage insurance charges

The pilot project would have saved the average borrower nearly $10,000 over the life of their mortgage, according to FHA estimates. Specifically, it would have allowed a reduction in the usual 1.75 percent mortgage insurance premium, charged upfront when the loan is taken out, to 1.25 percent. It also would have allowed a 0.25 percentage point reduction in the annual insurance premium charged on FHA loans, which currently runs as high as 1.35 percent of the loan amount.

The FHA could have taken those steps on its own, but it needed Congress to fund the homebuyer counseling and financial education programs that were required parts of the initiative.

The lack of funding doesn't kill the project outright, but the increased GOP domination in the new Congress makes it appear unlikely that it will be funded during the four years the pilot has been authorized.

The program received an enthusiastic welcome when it was unveiled from the National Association of Realtors, among others, who hailed it as an important step toward making mortgages more accessible to qualified borrowers who were currently shut out of the market.

Fannie, Freddie alternatives?

While Congress pulled the rug out from under the FHA program, both Fannie Mae and Freddie Mac recently announced initiatives to offer low-cost mortgages to borrowers with minimal down payments.

The Fannie Mae and Freddie Mac initiatives will allow borrowers to obtain mortgages with as little as 3 percent down, slightly lower than the FHA's 3.5 percent minimum. Fannie and Freddie loans also have significantly lower charges for mortgage insurance, which is charged on mortgages with less than 20 percent down, than the FHA does.

The Fannie Mae option is also linked to an existing program that allows borrowers with moderate incomes to get reduced interest rates and mortgage insurance. It's being offered immediately, while the Freddie Mac loan program won't be available until March.

Won't reach all would-be FHA borrowers

However, the Fannie and Freddie programs won't completely make up for squashing the FHA initiative. For one thing, FHA mortgages have considerably looser credit requirements than Fannie Mae and Freddie Mac require. The average FICO credit score for Fannie Mae and Freddie Mac loan is currently around 740; on FHA loans it's around 680. So borrowers with weaker credit may have difficulty qualifying for the Fannie Mae or Freddie Mac loan products.

In addition, it's not clear how widely available the 3 percent down Fannie Mae and Freddie Mac programs will be. Several major lenders, Bank of America among them, have already expressed reluctance about adding the new loan product to their line, even though the already offer other Fannie Mae and Freddie Mac loans. Two smaller lenders, 360 Mortgage and the recently rejuvenated ditech, have said they plan to offer the 3 percent loans, but so far the heavyweights have remained on the sidelines.

FHA loans, on the other hand, are widely available and offered by most lenders.

FHA loans, on the other hand, are widely available and offered by most lenders.

Published on December 19, 2014