Efforts to raise FHA downpayment continue on Capitol Hill
June 15th, 2011
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There is a serious movement on Capitol Hill to raise the Federal Housing Authority (FHA) downpayment to 5 percent. Now some might think, “Aha, this is a good idea because it will make the FHA mortgage program more secure.” The catch is that if you look at the pros and cons it quickly becomes apparent that the pros are nonexistent.
Cons of increasing FHA downpayments
“NAR strongly opposes increasing the downpayment for FHA,” says Ron Phipps, president of the National Association of Realtors. “The correlation between downpayment and loan performance is significantly less important than the linkage to strong underwriting, which FHA continues to have. FHA’s foreclosure rate remains less than conventional mortgages, so we don’t believe changes to the downpayment would do anything but disenfranchise many creditworthy homebuyers.”
HUD, itself, has said that an increase in the required downpayment would do just about nothing to improve the FHA mortgage program–and a lot to hurt it.
Testifying before Congress last year, former FHA Commissioner David H. Stevens, now the head of the Mortgage Bankers Association, said increasing the downpayment from 3.5 percent to 5 percent would reduce FHA loan volume by 40 percent.
If the FHA were a money-loser this might make sense but that’s not the case. For fiscal 2011 the FHA reserves are expected to generate a surplus of nearly $10 billion. That’s money that will be deposited with the Treasury.
Fewer mortgages fewer… ?
So what does it mean if there are 300,000 fewer FHA mortgages?
Well, one interesting idea is to look at who gets FHA loans.
As Mr. Stevens explains, 51 percent of African American and 45 percent of Hispanic homebuyers financed with FHA loans in 2008. So, if FHA loans are suddenly less desirable, there could be a disparate impact for minority purchasers.
The obvious purpose of raising the FHA downpayment is to reward a special interest. We have seen this before. For example, the fees lenders could charge borrowers used to be limited to 1 percent for most FHA loans. But then, on November 17, 2008, HUD announced a new policy. It decided to remove the fee limits, thus allowing lenders to pocket bigger profits with each FHA mortgage.
So now another gift to lenders is in the making. Is it any wonder that Congress has an approval rating of just 18 percent in the latest CBS poll?
An increase in the FHA downpayment is not a sure thing, but what’s certain is that the effort to devalue a program which has helped borrowers since the 1930s continues.
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