Loan Modification

FHA Commissioner Cautions Against Raising Minimum Down Payment

By Karen Lawson

In a statement prepared for a hearing before the House Financial Services Subcommittee, FHA Commissioner David H. Stevens asserts that raising the minimum down payment required for FHA loans would be harmful to the housing market. FHA determined that mortgage loans guaranteed by FHA would be reduced by 40%, or approximately 300,000 loans if the minimum down payment is increased. Increasing the minimum down payment from 3.5% to 5% would contribute an estimated $500,000 to FHA’s lagging reserves, but the Commissioner cautions that larger down payments would largely impact first time homebuyers “potentially forestalling the recovery of the housing market, and potentially leading to a double-dip in housing prices by significantly curtailing demand.” More than 75% of FHA purchase money mortgages were made to first time buyers during the past year, while nearly half of all first time buyers received FHA mortgage loans during the second quarter of 2009.  This sheds light on what would occur if a significant number of first time buyers are priced out of housing markets, especially in moderately priced neighborhoods. More than 800,000 FHA refinances assisted borrowers in converting their mortgage loans to fixed rates. Without the more lenient FHA underwriting guidelines, many homeowners may have been stuck with rapidly rising mortgage payments or mortgages that they couldn’t refinance due to loss of home value.

FHA isn’t Practicing  Sub-prime Lending

Although FHA has made a large number of mortgages in the wake of the sub-prime crisis, its lending practices are stricter and far less risky. FHA requires documentation of income and ability to make mortgage payment, and doesn’t provide “no documentation” mortgages, or home and refinance loans with risky features. 

 Some analysts are predicting a wave of foreclosures during 2010-2011, as historical data indicates that mortgage loans are most likely to fail during their second and third years, but FHA doesn’t expect higher than normal foreclosures under current guidelines. In addition to its standard mortgage loan programs, FHA also provides rehab loans for those buying and rehabilitating homes. This and other FHA home loan programs play a role in helping distressed communities recover from excessive foreclosures and depressed housing markets.

With mortgage rates remaining low, many families can afford to buy first homes using FHA mortgage loans. If FHA raises down payment requirements, it could well be a disservice to deserving borrowers, their communities, and the overall housing recovery.

In further defense of current FHA guidelines, Commissioner Stevens refutes the belief that borrowers who don’t have large down payments are at higher risk of defaulting on their mortgage loans; he suggests that a combination of a higher down payment and FICO score provides a more accurate prediction of loan performance than either factor alone.

As FHA continues to explore options for reducing risk while accommodating moderate income buyers and homeowners, it appears that cutting a large number of potential homeowners out of the housing market is not a sensible option.

Full post as published by FHA Mortgage Guide on March 11, 2010 (boomark / email).