Nov. 23 (Bloomberg) -- Three U.S. senators are trying to block a new Bush administration rule that congressional auditors said would unfairly hamper African-Americans trying to finance their first home purchase.

The rule, due to go into effect Jan. 1, would let the Federal Housing Administration charge higher premiums on mortgages it insures for low- and middle-income borrowers with poor credit. Borrowers who pose less of a credit risk would pay less.

The rule would impose a disproportionate burden on African- African home buyers, Congress's Government Accountability Office said in a July report. About 32 percent of current African- American borrowers would be disqualified from the program, and another 40 percent would pay higher premiums, the report said. About 79 percent of FHA-insured loans went to first-time homebuyers in 2006.

Senator Elizabeth Dole, the North Carolina Republican leading the effort to block the rule change, ``is concerned because the rule would make it more expensive for low-income and minority citizens to buy their first homes,'' her spokeswoman, Amy Auth, said in an interview last week.

Dole last week attached an amendment to a housing bill that would stop the rule from going into effect for a year. The other sponsors of the amendment were Connecticut Democrat Chris Dodd, the chairman of the Senate Banking Committee, and Richard Shelby of Alabama, the committee's ranking Republican.

Black homeownership is falling more rapidly than that of whites, and African-Americans are being stuck with more higher- cost mortgages when they refinance, the Federal Reserve has said.

FHA Premiums

Currently, the FHA charges premiums at the same rate for all home buyers. Under the new rule, it could charge a risky home buyer as much as $228 a year more on a $130,000 loan, the average cost of an FHA mortgage, Brian Montgomery, the Assistant Secretary of the Department of Housing and Urban Development, which oversees the FHA said Aug. 31.

The higher premium adds ``less than the cost of a Domino's pizza every month,'' Montgomery told a congressional hearing on Nov. 2. The average borrower's income is about $55,000 a year, Montgomery said.

Earlier this month, two congressmen asked HUD, which oversees the Housing Administration, to withdraw the rule allowing risk- based pricing.

``This proposal will result in unfair fee hikes on a broad range'' of homebuyers, House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, and Representative Maxine Waters, a California Democrat, wrote Nov. 2. HUD spokesman Lemar Wooley declined to comment.

Pricing Risk

``This is something that just makes common sense: Charge riskier borrowers more, and safer borrowers in turn will pay less,'' Montgomery said at the August press briefing. ``This is how all major insurance companies price risk.''

A disproportionate number of defaults on loans it insures has produced a $143 million deficit for the FHA, which wants to avoid asking Congress for a subsidy or raising premiums for all its borrowers. The FHA insures private lenders against losses from defaults by borrowers who meet its criteria. Those are mostly lower-income buyers purchasing their first home.

About 20,000 borrowers may refinance from conventional to FHA mortgages over the next year as a result of lower premiums and an aversion to subprime loans, he said.

Black homeownership fell nearly 2 percentage points in the first six months of this year to 46.3 percent, compared with a half-percentage point drop for whites, to 75.4 percent, the Federal Reserve reported in September. Blacks who refinanced home loans last year got high-cost loans 53 percent of the time, compared to 26 percent for whites.

Market Share

The FHA's market share plunged to 4 percent in August from 14 percent in 1999, according to agency data.

Dole used Senate procedures to put a hold on legislation seeking to give home buyers a federally-insured alternative to subprime loans. She lifted the hold last week when her amendment was attached to the bill. The legislation could be voted on by the Senate when it returns from recess next month.

A similar House bill, which passed in September, has a provision that would allow federal housing officials to use risk- based pricing, though this provision is somewhat different from the HUD rule.

``That's not helpful in my judgment in our working together,'' Congressman Frank, speaking of the differences between the House bill and the new rule, told Montgomery at the Nov. 2 hearing.

``I run an insurance company, sir,'' Montgomery said. ``I have to be mindful of not coming to Congress and asking for money.''

To contact the reporter on this story: Neil Roland in Washington at nroland@bloomberg.net

Last Updated: November 23, 2007 13:13 EST