House, Senate at odds on FHA pinch

Last Thursday, the Federal Housing Administration was forced to stop taking applications for FHA-insured loans. The FHA had run out of money. When this happened in April, Congress hastily bumped up the FHA credit ceiling from $60 billion to $74.4 billion.

This time, however, the House and Senate are stuck with mismatched bills to extend the popular FHA program. They have agreed to raise the ceiling to $132 billion, but other housing issues are gumming up the works.

Unless they can strike a compromise by the time they recess on Thursday, the 10,000 people who apply each day for an FHA-insured loan will either have to sit out the month of July -- one of the busiest real estate months of the year -- or get conventional financing.

Besides that, the 60-day mortgage commitments that banks made earlier this year are expiring. Many of the half million people who applied for FHA-insured loans earlier will have to lock in at current interest rates, which have edged up the past two months.

The FHA's problems are only the tip of the iceberg. Falling interest rates have sent America into a house-buying and home-refinancing stampede.

``The loan officers are backed up, the appraisers are backed up, the credit bureaus and even the title companies are backed up,'' says Josephine Holliday, an agent at the Washington real estate firm of MGMB. ``Settlement attorneys are turning people away. It's a system overload.''

This means a couple of things for prospective buyers. First, they need to get all their appointments -- for house appraisals, termite inspection, above all, a commitment on a loan -- set up early. One broker resorts to marking pens: To grab the attention of the overworked appraisers, she underlines her appraisal requests in red, yellow, and blue.

Second, buyers have to be alert to who's doing the paper work for their purchase. Banks are having to hire people and train them quickly; one agent works with a shoe salesman-turned-lender. This doesn't necessarily mean incompetence, but it could mean delays.

Whether the FHA's problems will bump up the cost of mortgages in general is a matter of dispute. If the agency has to keep turning down applications for, say, 60 to 90 days, banks, thrifts, and other lending institutions may tack on points (an up-front interest charge) to cover their increased workload and costs. The FHA now insures about 20 percent of all single-family residential loans, so that's a lot of people to set loose on the conventional loan market.

Most people, however, doubt that Congress would let the FHA hang in limbo that long. Besides, they say that interest rates have edged up of their own accord, and FHA borrowers -- about 20 percent of all borrowers, but at the lower end of the scale -- will probably not have that much impact.

Still, the FHA snafu hits at those who are least able to afford it. FHA-insured loans, which can't exceed $67,500 (or $90,000 in high-cost areas like big cities), are often the only way a first-time buyer can afford to invest in real estate. An FHA loan allows them to put down less money (as low as 3 percent).

Since a lender can't close on these loans while the FHA's lending authority is suspended, people whose FHA loans were initiated in mid-April can expect to pay $1,200 to $1,800 in higher interest rates or higher points on an average FHA-insured loan.