Are Bigger FHA Downpayments Coming?
October 5th, 2009
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Rep. Scott Garrett (R-NJ) has a new bill that would cut off FHA mortgages from large numbers of borrowers.
Under the grossly mis-named FHA Taxpayer Protection Act of 2009 (HR. 3706), Garrett would increase the minimum FHA mortgage downpayment from 3.5 percent to 5 percent AND prohibit the financing of closing costs under such mortgages.
In essence, what Garrett is proposing is a back-door way to close down the FHA program at a time when we need more home sales to bring back real estate values.
“Homeownership is a noble goal,” Garrett says. “However, the benefits of promoting homeownership using government subsidies must be balanced against the potential risk of insuring less creditworthy borrowers and exposing the American taxpayer to that risk. As we have learned repeatedly throughout the mortgage crisis, the amount of equity a homeowner has in their home directly correlates to the credit risk associated to their mortgage. In trying to find a reasonable balance between the current, extraordinarily low level and a level that would ensure a significant reduction of risk to the taxpayer, I am introducing legislation to increase the FHA down payment requirement to 5%.”
Here’s the reality:
FHA mortgages have LOWER foreclosure levels than prime loans. Who says so? The Mortgage Bankers of America. As the Association reported in August, 3.00 of all prime loans were in the process of foreclosure versus 15.05 percent for subprime loans and 2.98 percent for FHA mortgages.
The effort to increase the FHA down payment would reduce the number of FHA mortgages issued each quarter. With fewer mortgages there would be fewer home sales and less refinancing. The result of fewer home sales would be larger numbers of unsold homes and bigger inventories of unsold homes would push down home values.
Is this a smart policy at this time? Not hardly.
But Garrett would go further. He not only wants to raise the down payment requirement, he wants to substantially increase the cash requirement at closing but prohibiting the use of FHA funds to cover certain closing costs.
This would mean that future FHA borrowers would have to come up not only with a larger down payment but also with thousands of dollars in cash to pay steep closing costs.
How much more would you need up-front with a Garrett FHA loan? Instead of 3.5 percent you would need 5 percent up front. In addition, you would also need another 1 percent or so for cash closing costs — this is a figure which Garrett cites from a GAO study. Meaning, the cash needed to buy with an FHA mortgage would effectively go from 3.5 percent to 6 percent.
Garrett says that “Congress set the FHA down payment requirement at 3.5% and allowed closing costs to be included as part of that number. This effectively allowed FHA down payment levels to be as low as 2.5%.”
Despite the fancy wording from Garrett, the reality is that you currently need 3.5 percent in cash up front for a typical FHA loan. If you try to buy with just 2.5 percent your FHA mortgage application will be declined.
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October 6th, 2009 at 9:29 am
“Here’s the reality:
FHA mortgages have LOWER foreclosure levels than prime loans. Who says so? The Mortgage Bankers of America. As the Association reported in August, 3.00 of all prime loans were in the process of foreclosure versus 15.05 percent for subprime loans and 2.98 percent for FHA mortgages.”
That’s the furthest thing from reality. The only reason FHA foreclosures are lower is that they weren’t the primary source for subprime mortgage lending until 2007. Even in this downturn, foreclosures aren’t rampant within 48 months of purchase.
The REALITY is that FHA and VA government guaranteed mortgages had a 15.1% delinquency rate as of Q2 ‘09. By comparison, prime mortgages had a 4.7% delinquency rate.
The FHA is the new subprime market and that foreclosure number is rising rapidly as delinquencies aren’t resolved.
Regardless of all I just said, the REAL reason for this change is the FHA’s reserves have dropped below 2% which means their subprime lending will soon be paid for by taxpayers.
http://homeecblog.wordpress.com/2009/10/05/fha-taxpayer-protection-act-of-2009/
October 31st, 2009 at 7:10 pm
Myron,
Thanks for correcting this article. I was going to do it but you’ve done it nicely. It’s all we can do to surf the web looking for misleading information and posting the truth. It’s a full time job to stay on top of the spin.
Angrywoodchuck