Bad Risk?

The rift between HUD and Congress over modernizing the FHA deepened in recent weeks as HUD moved forward with plans to charge riskier borrowers a higher premium, starting as soon as Jan. 2, 2008.

Risk-based pricing would reward borrowers who have better credit and a larger down payment with a lower premium for a federally insured mortgage. Riskier borrowers, such as those with poor credit and less money saved for a down payment, would pay more for their FHA loan.

Last summer, the government's General Accounting Office (GAO) reported to the Senate Committee on Banking, Housing and Urban Affairs that risk-based pricing could have a significant impact on FHA borrowers. By analyzing FHA borrowers from 2005, the GAO found that under risk-based pricing, one in five of those borrowers—and one in three African-American borrowers—wouldn't have qualified for an FHA-insured loan.

“That's a big deal,” says Scott Syphax, president and CEO of the down-payment assistance group Nehemiah Corp. of America. “If they can't buy homes with FHA, what options do they have? Predatory lenders.”

Additionally, 37 percent of borrowers would have paid higher premiums, the GAO report says. Another 43 percent of borrowers would have paid the same or less than they paid under the FHA's current, flat-rate pricing.

Congress and the administration locked horns on a regular basis in 2007 on FHA modernization legislation, which passed the House and currently is under consideration in the Senate. Among other changes, the reform bill would increase loan limits and reduce down-payment requirements for borrowers.

They're important adjustments. In recent years, the FHA's low lending limits, coupled with higher housing prices and the proliferation of subprime lenders offering 100 percent financing, had put the FHA at a competitive disadvantage in serving its primary market, first-time and credit-challenged home buyers.

HUD attempted to do away with seller-funded down-payment assistance programs as part of FHA modernization, citing statistics that showed that borrowers using the programs defaulted at a significantly higher rate. Down-payment assistance groups sued, and a federal judge granted a preliminary injunction just days before HUD was scheduled to begin banning the assistance.

HUD officials also balked at a House proposal to use FHA surplus money to fund an affordable-housing trust fund, saying it put the agency's reserves at risk.

Then, in early November, House Financial Services Committee chairman Rep. Barney Frank, D-Mass., chastised FHA commissioner Brian Montgomery and HUD secretary Alphonso Jackson, accusing HUD of acting unilaterally on implementing risk-based pricing before Congress finished its work on FHA reform.

HUD has the ability to raise premiums without legislative approval, but has held off because the FHA modernization bill was moving forward, says a senior FHA official who spoke on the condition of anonymity. When it seemed less certain that the legislation would pass (a similar bill failed in the 2006 session), HUD announced it would implement risk-based premiums. Without it—and with the requirement that the FHA accept loans with seller-funded down-payment assistance—the FHA would have to raise all of its borrowers' premiums to stay in the black, the official says.

“We didn't want to sit and wait for the legislation knowing we'd have to take some steps to strengthen the insurance fund,” the official says. “Not only has our volume been flat, but for the last couple years, a lot of people who ordinarily would have gone FHA went subprime, so the people we wound up serving were the most likely to default. We had adverse selection. This is an attempt to attract better borrowers to even out the risk. … People with worse credit pay more, but those people can use FHA and get a much better deal than if they had to go to subprime.”

One thing that could stall implementation is the complexity of the new pricing formula, which factors in credit history and the amount and source of the down payment. The FHA official says that HUD is considering pushing back the start date of using risk-based pricing to give mortgage originators extra time to learn the pricing formula.

A U.S. Conference of Mayors (USCM) economic impact report on the foreclosure crisis predicts sharp losses in the growth of gross domestic product (GDP) and projects economic output losses for 361 metro areas in 2008. The report, “The Mortgage Crisis: Economic and Fiscal Implications for Metro Areas,” predicts a GDP growth loss of $166 billion, with economic losses among the top 10 metro areas topping $45 billion. The report can be found at www.usmayors.org.—N. F. Maynard

Bureau of Labor Statistics data show a decline in construction productivity over the past four decades, while virtually every other nonfarm industry has increased productivity by more than 200 percent. The American Institute of Architects is hoping to change that course with its new primer, “Integrated Project Delivery: A Guide,” on effective team models integrating people, systems, business structures, and practices. Advocating better collaboration, the guide offers strategies for optimized project results, waste reduction, and design and building efficiencies. It's free at www.aia.org/ipdg.—J. Sullivan

Building projects of all types can apply for the Holcim Awards for Sustainable Construction. The awards carry prize money totaling $2 million and are sponsored by the Swiss-based Holcim Foundation for Sustainable Construction. For more information, visit www.holcimawards.org.—E. Butterfield

Builders who want to help buyers make their homes healthy and environmentally friendly can point them to the U.S. Green Building Council's new Web site, www.greenhomeguide.org. Made possible through support from San Diego–based Newland Communities, the site has checklists for new and existing homes, details on the LEED for Homes system, a list of LEED builders, and tips on reducing the use of natural resources.—P. Curry

One of bankrupt Kara Homes' communities, Birch Hill in Old Bridge, N.J., will be completed by West Branch, N.J.–based PRC Homes. Kara, which filed Chapter 11 in October 2006, had finished only 72 of 253 homes in this active adult community. PRC is partnering with Amboy National Bank, which has a $26 million lien on the property, to complete the community, now called Madison Crossing at Birch Hill.—J. Caulfield

SOURCE: SUBURBAN NEWSPAPERS

Indianapolis is still the most affordable major U.S. housing market, according to third-quarter 2007 results released late last year by the NAHB/ Wells Fargo Housing Opportunity Index (HOI). The HOI reported that 87.5 percent of homes sold in Indianapolis in the third quarter were affordable to families earning the area's median household income of $63,800. The city has maintained first place in the HOI for nine consecutive quarters.—S. Zurier

Measure for Measure

An Oregon bill fast-tracks small projects but reins in large developments.

A land-use bill that went into effect in Oregon on Dec. 8 shouldn't have a major impact on residential development there. But in a state where land is a “theological” issue, no measure can ever completely settle the debate about its use.

That's the assessment of Jon Chandler, CEO of the Oregon HBA, about Measure 49, which Oregon voters approved in November to fix flaws in another bill, Measure 37, which voters had overwhelmingly approved in 2004. Under Measure 37, local governments have to compensate property owners if zoning restrictions devalue land purchased prior to the adoption of those regulations. That law turned into a litigious free-for-all, generating more than 7,500 claims on 750,000 acres. Measure 49 expedites approval for landowners with valid claims that want to build one to three houses. It also makes construction of four to 10 houses more complicated and prohibits landowners from putting more than 10 units on any one parcel.

The land in question falls outside of Oregon's urban growth boundary, and most of it is farms, forests, desert, or underpopulated to the point where large-scale development would be untenable. “The pro-49 people made it sound like developments were sprouting like mushrooms under 37, but in fact very little development actually happened,” says Chandler. He notes, too, that environmental and other land-use restrictions beyond these measures keep residential development in Oregon hemmed in.

Chandler is watching whether passage of 49 results in the refunding of what's known as “The Big Look,” a task force that's charged with conducting a review of the Oregon Statewide Planning Program and making recommendations for needed changes to the 2009 legislature. “It would be a mistake if 49 passed without looking at where [agriculture] and timber fit in the future.” - John Caulfield

Parts and Labor

Old houses create new jobs.

One man's teardown is another man's treasure. At least that's how Mark Foster is rephrasing the saying. Four years ago, the Baltimore native left the restaurant development business to create Second Chance, a nonprofit that rescues reusable building materials from soon-to-be-demolished homes and resells the goods in warehouses around the city.

Saving vintage transoms, beams, and crown molding from the landfill is just one aspect of the organization's good work. Second Chance also trains displaced workers (mostly individuals who have lost their jobs to corporate downsizing or overseas outsourcing) to become “deconstruction” experts on the crews that mine said houses for treasure. Sales of salvaged materials provide funding for workforce development.

It's a winning proposition. Teardown builders and homeowners reduce their demolition and waste removal expenses, get a tax write-off for charitable giving, and do their part to save the planet. Reclaimed building materials are given a second lease on life. Unemployed workers learn a new trade and get a chance at a new career.

With sustainability concerns top of mind among builders, Second Chance now gets three or four calls per month to harvest properties slated for the wrecking ball. Teardown homes serve as classrooms for new trainees, who, upon becoming skilled in the art of deconstruction, go on to dismantle more historically significant buildings.

“Roughly 60 percent to 70 percent of the average house can be salvaged, and we may take up to 30 percent of that material [for resale],” Foster says. Remaining materials such as concrete, wood, and metal debris can be segregated on site for recycling—a practice that is gaining traction among demolition subcontractors, he says.

The nonprofit's five Baltimore warehouses have become gold mines for unique finds. Jim Smith, a Second Chance sales associate, recalls one homeowner who discovered that her 19th-century row home had once been graced by an ornate stoop railing. “She found a similar railing in our warehouse and had it installed on her steps to re-create the home's original historic look.”- Jenny Sullivan