FHA rules streamlined! Much better!

WASHINGTON -- The federal government's biggest home mortgage program streamlined itself at the end of December, and that could be good news for buyers, sellers, realty agents and builders in 2006.
In fact, the Federal Housing Administration's decision to eliminate or soften many onerous rules about property conditions and mandatory repairs should be a stimulant to the entire housing market this year. It could help open low-down-payment mortgages to thousands of first-time, moderate-income purchasers who might have turned to higher-fee subprime alternatives.
Those new buyers, in turn, could give sellers of lower-cost dwellings the cash to move up to more costly properties -- and prompt more sales activity at successive levels up the housing price ladder.
The FHA once dominated the lower-cost segment of the national housing market, and was a crucial entry point for young, minority and lower-income purchasers. But in recent years it has been heavily criticized for enforcing decades-old, overly paternal requirements about property condition and repairs of resale houses. In the boom markets of 2004-2005, realty agents often advised sellers to reject purchase offers that came with FHA mortgage financing contingencies.
Whereas buyers using other forms of financing could buy houses "as is," FHA rules required painting, patching, repairs and inspections before the mortgage could be closed -- even if the defects were minor and did not affect health or safety. FHA-contingent offers were viewed as too troublesome to bother with, and realty agents, lenders and sellers in some urban areas effectively boycotted the program. Meanwhile, FHA's share of the market plummeted to a record-low 3%, down from 11% less than a decade earlier.
Thanks to a clean sweep of its rules last year and revised repair and inspection standards lenders were told about at the end of December, agents and home sellers might begin to take a fresh look at FHA. Buying a house with FHA financing won't put bidders at a competitive disadvantage any longer.
In a Dec. 19 letter to hundreds of lenders across the country, FHA Commissioner Brian Montgomery announced that his agency "has shifted from its historical emphasis on the repair of minor property deficiencies and now only requires repairs for those property conditions that rise above cosmetic defects, minor defects and normal wear and tear."
Before the policy overhaul, FHA required repairs on resale homes for defects such as:
Cracked windowpanes.
Leaky faucets.
Soiled or poorly installed carpeting.
Missing handrails.
Cracked or buckled sheetrock or plaster.
Crawl spaces that contained any type of debris or trash.
Flooring finishes that were worn or deteriorated.
Cracked sidewalks.
Though the agency considered its strict standards to be a valuable consumer protection measure, almost everybody else in the market considered them to be needlessly nitpicky. Under the more tolerant standards, minor defects won't have to be repaired before the mortgage closing.
House defects such as structural problems, foundation damage, bad roofing and electrical hazards that pose more serious risks to buyers still will be subject to a mandatory repair rule.
FHA also announced that mandatory inspections for a number of property conditions have been waived, too. These include:
Termite and other insect damage problems, unless there is "evidence of active infestation" or local real estate regulations require inspections.
Septic systems in which there is no evidence of malfunction.
Wells that are functioning normally and show no signs of contamination.
FHA's streamlining of property rules is part of a much broader effort within the agency to regain its role in the national real estate marketplace. Last year Montgomery and federal Housing Secretary Alphonso Jackson said they agree with critics who said FHA rules and procedures were out of date. More importantly, said Jackson, FHA had an important traditional mission to uphold to ease the way into homeownership for lower-income and minority renters, through low down payments and generous credit and debt ratio standards.
"We need to reach out" to African-American, Hispanic and other consumers with better loan concepts, less red tape and faster mortgage approvals, he said. Jackson argued that in comparison with most subprime loans, FHA "offers a better deal. We've got a superior product" -- lower interest rates, lower fees, no prepayment penalties and mortgage limits up to $362,790 in high-cost urban areas and $200,160 in others.
The latest rule changes might not get rid of all the boo-birds -- after all, FHA is a government-run insurance program -- but it should get the attention of buyers and sellers in the moderate-cost segments of the market and the realty and lending professionals who work with them.