As reported by DSNews: http://www.dsnews.com/articles/congressman-seeks-to-raise-fha-down-payments-2009-10-02
A bill introduced in the House of Representatives Thursday aims to limit defaults on mortgages backed by the Federal Housing Administration by further tightening standards on borrowers.
The bill, sponsored and introduced by Rep. Scott Garrett (R.-New Jersey), would raise the minimum down payment on FHA loans to 5 percent of the principal, from its current minimum of 3.5 percent. The bill also would restrict borrowers from using FHA loan money to cover their closing costs.Both moves are intended to stem defaults and foreclosures on FHA-guaranteed loans, which are guaranteed by federal funds if borrowers can’t pay. Since the beginning of the housing crisis, concern has grown among politicians and market analysts about the FHA’s ability to pay out on massive defaults.
That’s because FHA financing has exploded in popularity, especially among less-than-stellar borrowers, as credit markets tightened in the downturn and lenders cracked down on subprime and Alt-A loans. FHA loans accounted for less than 5 percent of all U.S. mortgages at the height of the boom in 2005 and 2006; by this year, more than 20 percent of all new loans were FHA guaranteed, according to FHA figures.
Worries about the guaranteed loans intensified in the past month after federal officials indicated that the FHA’s cash reserves would dip below their legally mandated level of 2 percent of FHA-backed loans. That’s chiefly a result of the accelerated pace of lending, but it also reflects a higher rate of problems with FHA borrowers. The rate of serious delinquencies on government-backed mortgages jumped to 7.5 percent in the second quarter of 2009, a 16 percent rise since the beginning of the year, according to statistics from the Office of the Comptroller of the Currency this week.
The FHA is fast becoming a substitute for “the riskier part of the mortgage market,” Fed Chairman Ben Bernanke told Congress at a hearing on Capitol Hill Thursday. “It’s the only source of mortgages where down payments can be less than basically 20%. And so it is providing mortgage access to a large number of people who could not otherwise buy homes.”
Yet despite FHA’s historical role as a safety valve for new buyers and credit rebuilders, Congress has recently wondered whether FHA’s easy lending is too risky, and whether it could end up costing taxpayers more in the long run. Last year, lawmakers approved a hike in the down-payment requirement to 3.5 percent from 3 percent, and closed a loophole that let sellers cover a purchaser’s down payment. Studies show that borrowers who put less money down are likelier to default in the life of a mortgage.
Republicans made that point in questioning Bernanke Thursday, but he underscored that a balance ultimately needed to be struck between lending risk and credit availability for deserving but needy borrowers.
“You could make the conditions tougher and tougher,” he said, but “that reduces the risk to the taxpayer, absolutely. And it reduces the number of people who can get mortgages.”
A full report on the FHA’s financial state is expected in the coming weeks. A spokesman for agency responded to the Republicans’ concerns and the new bill in a statement Thursday.
“As FHA is key to the housing recovery, we would urge Congress not to take precipitous action while we are awaiting the full details of the independent actuarial study,” it said.
The U.S. central bank found that denials were even higher for minorities. The rejection rate for all home loans was about 32 percent last year – about the same as in 2007 – but when looking at just black and Hispanic borrowers, the Fed said the denial rate was more than twice as high as the rate for white borrowers.
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