Dow Jones Newswires | A measure to put the Federal Housing
Administration on firmer financial footing sailed through the House of
Representatives Thursday.

The legislation, approved 406-4, would nearly triple the cap on annual
premiums the FHA can charge borrowers and give the agency more power to
protect itself from fraudulent or poorly underwritten loans.

Backers said the bill would help the FHA rebuild its reserves without harming the agency’s mission of backing low down payment loans for low- and middle-income  borrowers.

The measures would reduce the risk to the FHA insurance fund “while protecting the interests of low-income home buyers,” the White House said this week in a statement before debate on the bill. Companion legislation has not been introduced in the Senate.

Mortgage defaults have eaten through the FHA’s capital reserves as the agency has swelled to prop up the mortgage market in the wake of the housing bust. The losses have fanned fears the Depression-era agency will require a taxpayer bailout for the first time.

Last fall, the FHA reported its reserves had fallen to $3.6 billion as of Sept. 30, or just 0.53 percent of the $685 billion of FHA loans in force at that time.

The House-passed legislation would raise the cap on the annual premiums the FHA charges borrowers to 1.50 percent from 0.55 percent. It would also beef up the agency’s powers to weed out lenders costing it too much in claims and make it easier for the FHA to shield its insurance fund from losses on loans that were underwritten fraudulently or that violated FHA standards.

The FHA pushed for the legislation, which it says will allow it to replenish its reserves faster. The agency estimates the proposed changes will generate about $300 million a month in additional positive receipts, while costing the average FHA borrower $42 extra in monthly premiums.

Republicans, who contend the FHA is overstretched, attempted to scale back the agency.

The House defeated an amendment offered by Rep. Scott Garrett (R-N.J.) that would have raised the FHA’s minimum down payment to 5 percent from 3.5 percent. It also rejected another Republican amendment to roll back by 2012 the FHA’s market share to 10 percent of all newly originated mortgages.

An amendment to repeal the FHA’s temporary authority to insure loans as large as $720,000 in certain costly markets also failed.

However, Republicans inserted language, offered by Rep. Chris Lee (R., N.Y.) that would require the Secretary of the Department of Housing and Urban Development to rein in “strategic defaults” on FHA loans.

The amendment requires the HUD secretary to define strategic default and work with lenders to block borrowers who default when they can still afford their mortgages from the FHA program. The amendment also requires HUD to use all its powers to ensure the FHA is sufficiently capitalized.

The House accepted an amendment to boost the availability of affordable rental housing in costly markets by increasing the FHA limits on loans for apartment construction and renovation.

“In our most expensive cities, it is very difficult for some of the community’s workers — including police, firefighters, and teachers — to find affordable rental housing where they work,” said Rep. Gary Miller (R-Calif.), who sponsored the amendment with Rep. Anthony Weiner (D-N.Y.).

The FHA doesn’t lend directly; it insures mortgages for borrowers that meet its standards. FHA loans require borrowers to pay a 3.5 percent down payment and monthly and annual premiums.

The agency has played an outsized role after private firms fled the secondary mortgage market in the housing bust. It  backs about a third of all new home-purchase mortgages.

In recent months, the FHA has tightened standards for borrowers and expelled more than a thousand lenders from its program.

The agency raised its upfront borrower premiums to 2.25 percent from 1.75 percent, but it intends to lower that premium to around 1% once it has the power to increase the annual premium. Then, the FHA plans to raise the annual premium to 0.90 percent from the current 0.55 percent.