Loan Modification

Are Bigger FHA Down Payments Coming?

By Peter G. Miller

FHA Commission David H. Stevens was asked why with so many recent changes the FHA mortgage program has not increased down payment requirements. His March message included this exchange:

Q: Why didn?t you just impose an across-the-board increase in required down payment?

A: There are a range of factors that determine how risky a loan can be, not just the down payment level. The data clearly show that the greatest problems are created by a combination of a low down payment and other factors, like low credit scores, higher back-end ratios, or other debt characteristics. Indeed, loans with lower down payments and higher credit scores perform better on average than some sets of higher down payment, lower credit score loans. So in addressing risk, we need to take a focused approach to ensure that we are targeting our measures appropriately. Our change enables a broader selection of credit-worthy borrowers than would be afforded by an across the board increase in the down payment requirement, while avoiding the significant, disproportionate impact on minorities that such an overbroad measure would have.

Translation: If we raise the down payment requirement for FHA loans we’ll make fewer mortgages and that won’t be good for the marketplace.

In fact, it’s virtually impossible for the FHA to raise down payment requirements, something which is likely to be true for some time. Here’s why:

The real estate market is barely functioning. Yes, homes are being bought and sold but beneath everything is a vast inventory of unsold and maybe unsaleable real estate now held by lenders. Until this inventory of distressed properties is cleared out there is no possibility of real and sustained price appreciation in local markets which have high numbers of foreclosures.

Lenders cannot get rid of these homes in major foreclosure zones.

Free Rent

“Throughout the country,” says the Los Angeles Times, “people continue to default on their home loans — but lenders have backed off on forced evictions, allowing many to remain in their homes, essentially rent-free.” (See: Many borrowers in default stay put as lenders delay evictions, February 27, 2010)

Okay, let’s spring ahead. The financial mess is over, homes are selling and the FHA mortgage program necessarily losses marketshare as more private-sector lenders enter the marketplace.

Does the FHA then raise down payment requirements? As you kidding? Stiffen FHA qualification standards when loan volume is falling and home values are rising? That makes no sense.

There’s no question the FHA loan guidelines are going to evolve. I see higher annual insurance payments ahead — up-front insurance charges have already been raised and will likely be raised again.

But higher down payments? Nope. That just would not be good at this time — and it won’t be good if times get better.

Full post as published by FHA Mortgage Guide on March 10, 2010 (boomark / email).