Congress has passed and President Bush will soon sign into law H.R. 3221, omnibus housing legislation that is intended to address the current crisis in the housing marketplace. This new law, which runs 694 pages in length, contains major reforms of the FHA insurance programs administered by HUD and creates an FHA rescue-refinancing program to help homeowners avoid foreclosure. The law also allows the federal government to invest in Fannie Mae and Freddie Mac to help protect against potential under-capitalization which could result in major disruptions to both the U.S. housing market and the global financial markets. The Act also creates a new and more robust regulatory regime for Fannie Mae and Freddie Mac including a new federal regulator, the Federal Housing Finance Agency (FHFA).

There are several provisions contained in the Act pertaining specifically to manufactured housing for which MHI has strongly advocated over the past several years. Below is a summary of these provisions. To download a copy click here. These major provisions include: reform of the FHA title I (home only) insurance program; reform of the FHA title II (real property) insurance program relating to long-term leaseholds and insurance eligibility for manufactured housing condominiums; and the creation of a new “duty to serve” the manufactured housing industry for Fannie Mae and Freddie Mac.

The Act is also notable for several legislative proposals that were not included in the final package. MHI was successful in keeping out mandates for weather radios in manufactured homes that was contained in a House bill passed last year. The Act also does not include a GAO study relating to the risks to manufactured housing residents from tornados which was part of an earlier House version of FHA title I legislation. Additionally it does not include loan “cram downs”, which would give bankruptcy judges the discretion to reduce loan balances and interest rates and to increase loan terms, all to the detriment of lenders and investors.

FHA Title I

The major problems relating to the FHA Title I program over recent years have been that loan limits have not increased since 1992 and thus have not kept pace with production costs of the industry. In addition, the program provides limited insurance coverage which has served as a disincentive to participation by both lenders and by Ginnie Mae.

The Act remedies these problems first by dramatically raising the loan limits. For example, the loan limits for “home only” loans which comprise approximately 95% of all title I loans will increase from $48,600 to $69,678 and will be indexed annually for inflation. For point of reference, the median price for manufactured homes in 2007 was $65,100. In addition, the Act mandates converting the current, limited insurance system to the more mainstream “loan-by-loan” insurance system similar to the one used for the FHA title II program. These changes will allow FHA to insure today’s modern manufactured homes while vastly improving the insurance coverage for lenders in the event of a loan foreclosure. The insurance changes are especially important to Ginnie Mae which functions as a backstop to lenders by guaranteeing the timely payment of principal and interest to investors on asset-backed securities.

To ensure that the new program is viable going forward, the Act includes safeguards relating to financial soundness. HUD has the authority to increase the upfront insurance premium not to exceed 2.25 percent and may charge an annual premium of up to 1 percent of the remaining principal balance. HUD may exceed these limitations only if necessary to keep the program financially sound, and may not increase premiums in excess of the minimum necessary to maintain a negative credit subsidy. HUD also has the authority to establish underwriting criteria to ensure the program is financially sound.

The current FHA title I program includes a HUD regulation (24 CFR 201.25(d)) that prohibits the referral of any fees by a lender or a borrower to dealers, manufacturers, or any other party in connection with originating a loan. This regulation is codified in the Act by incorporating section 10 of the Real Estate Settlement Procedures Act (RESPA) which prohibits the payment of fees other than for services actually performed. RESPA has applied to all real property loans since its inception in 1974.

For title I loans securing homes that go into land-lease communities, there is a requirement for a three year lease term. This provision is intended to afford some protection to residents when a community closes which requires the residents to move their homes while continuing to pay the outstanding loan balance. However, the language does not dictate any provisions that must be contained in the lease.

Many of the title I reforms are very sweeping in nature, particularly the new insurance system and the increased loan limits. It is HUD’s intent to roll out the reformed title I program at the same time, including the increased loan limits together with the new insurance system and new underwriting guidelines. MHI and its members will work closely with HUD on the implementation of the reformed title I program.

FHA Title II

The Act contains two provisions that specifically apply to manufactured housing and were included at MHI’s request. These provisions relate to loans regarding long-term leaseholds and manufactured housing condominiums.

FHA may insure mortgages for manufactured homes permanently affixed to land that is owned or leased under a long-term leasehold arrangement. Current law requires that manufactured housing must be classified as real estate. Unfortunately, by regulation, FHA expanded upon the law, stating that the homes must also be taxed as real estate. This additional requirement renders FHA financing impossible for manufactured homes subject to a long-term lease in some states because these homes are taxed as personal property. The Act clarifies this situation by stating that taxation is not relevant to the definition of real estate.

By law, FHA may insure mortgages on individual housing units in condominium developments and also may insure mortgages on manufactured housing units. However, FHA’s regulations prevent FHA financing if the two types of housing are combined. These regulations, written in the 1960s, established distinct and separate policy guidance for each type of housing and have never been updated. Today, manufactured housing condominiums are a growing trend and important source of affordable housing. The Act makes it clear that it is permissible under the law for FHA to insure a manufactured housing unit that meets all other FHA standards when it is located in a condominium development.

Regulation of Fannie Mae and Freddie Mac

In addition to potential federal investment in Fannie Mae and Freddie Mac, the Act creates a new regulatory regime for Fannie and Freddie. The FHFA will become the new regulator and will be equipped with greater powers than the existing regulator. Significantly, the Act also states that Fannie and Freddie will be required to meet a new “duty to serve certain underserved markets”. Manufactured housing is one of only three underserved markets identified in the Act (rural housing and affordable housing preservation being the other two markets). Earlier versions of the legislation contained as many as 9 underserved markets. The reduction to three underserved markets, including manufactured housing, is intended to focus Fannie and Freddie more closely on these markets.

The Act states that Fannie and Freddie shall provide leadership to the market and facilitate a secondary market for manufactured housing loans for low- and moderate-income homebuyers. In serving this market, they are both required to develop new manufactured housing loan products with flexible underwriting standards.

Effective for 2010 and thereafter, the FHFA is required to establish a manner for evaluating whether and to what extent Fannie and Freddie have complied with this “duty to serve”. The Act also requires the FHFA to annually evaluate and rate Fannie’s and Freddie’s compliance with its new responsibilities relating to manufactured housing, taking into account the volume of manufactured loans purchased and their outreach to lenders. In determining compliance, the Act specifically provides that the FHFA may consider manufactured home loans secured by both real property and personal property. If either Fannie or Freddie fails to meet its manufactured housing duties for a particular year, the FHFA may require Fannie and Freddie to submit a housing plan to it describing the specific actions that will be taken that will allow the Director to monitor compliance for the next calendar year. MHI and its lender members will work closely with the FHFA, Fannie and Freddie regarding the implementation of this new duty to serve the manufactured housing marketplace.

Miscellaneous Provisions

The Act also contains several general provisions of interest which are not manufactured housing-specific in nature. These provisions are briefly described below.

The Act contains two tax provisions that are notable. The first provision is a first-time homebuyer taxed credit that will assist new homebuyers in making down-payments. The credit would provide homebuyers with an interest-free loan of ten percent of the home’s purchase price up to $7500. The homebuyer will be required to repay the loan to the federal government over a 15 year period in equal installments. The credit is phased out for taxpayers with adjusted gross incomes above $75,000 ($150,000 for joint filers). This tax credit is available for first-time homebuyers purchasing a principle residence, including manufactured homes, and runs through June 2009.

The second tax provision provides a standard deduction for real property taxes to assist homeowners who do not itemize their income tax returns. These homeowners may claim an additional standard deduction of up to $500 ($1,000 for joint filers) regarding state and local real property taxes. This provision applies to the 2008 tax year only.

In response to the huge public outcry surrounding alleged mortgage fraud in the housing market, the Act establishes and sets minimum standards for a nationwide mortgage licensing and registration system for mortgage brokers and bank loan officers. Briefly, individuals need to be licensed if they take a mortgage application and offer or negotiate loan terms for compensation or gain. There is an exemption for individuals who perform clerical tasks such as communicating with consumers to obtain information necessary for the processing or underwriting of a loan.

The Act also prohibits borrowers from using funds from a seller-funded assistance program (e.g. Nehemiah, Ameridream) toward a down payment on an FHA loan. In the past, borrowers who received this type of assistance were far more likely to default on their FHA loan. In addition, these programs often resulted in higher home purchase prices, which increased the borrower’s monthly payment.

The Act also creates an affordable housing trust fund. The fund will provide grants to states to increase homeownership opportunities for extremely low- and very-low income families.