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March 11th, 2010

Can Borrowers Save the System?



There’s a significant divide between those at the Federal Housing Administration (FHA) and its critics over how the FHA can improve their fiscal situation and the housing market as a whole.

To balance both their struggles and success in the market, the FHA announced “a set of policy changes” back in January that were designed to both strengthen their shaky capital reserves, and to enable the administration to aid in housing’s recovery. For the most part, the changes amounted to an increase in the up-front mortgage insurance premium (MIP).

“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important,” said Commissioner [David] Stevens.

However, it seems the FHA’s changes weren’t enough for some. Among the changes announced two months ago, an increase to the FHA’s industry-low standard of 3.5% down wasn’t among them. Here’s why:

An increase in down payments to 5%, from the current minimum 3.5%, would limit new FHA-backed loans by 40%, equivalent to 300,000 fewer home sales, according to testimony that FHA Commissioner David  is set to deliver on Thursday.

“We share the goal of increasing equity in home purchase transactions, but determined after extensive evaluation that such a proposal would adversely impact the housing market recovery,” Mr. Stevens says in his testimony.

Yet, the FHA’s notion that getting more borrowers into their system is the answer to their problems is at odds with one lawmaker who says that kind of reasoning is why the FHA is in trouble already:

“It’s that sort of rationale that got us into the problem in the first place, that we need to be chasing the borrowers to prop up our system,” says Rep. Scott Garrett (R., N.J). “That’s what got us here in the first place.”

Rep. Garrett said he plans to submit an amendment to the FHA’s bill that would increase minimum down payments to 5%. Republicans introduced a separate bill on Wednesday that would make many of the changes proposed by the agency and create additional oversight. But that measure wouldn’t increase minimum down payments.

Should the FHA raise their down-payment requirements? Should they raise their annual MIP, too? What other changes should they make?

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2 Responses to “Can Borrowers Save the System?”

  1. New FHA Requirements : Ryan Davison – Real Estate Property Specialist Says: March 24th, 2010 at 8:54 pm

    [...] Can Borrowers Save the System? (hsh.com) [...]

  2. George Callas Says: October 12th, 2011 at 6:54 pm

    Our highly paid government honchos, highly paid bank and wall st. reps forgot the first lesson of Econ 101 which I learned and memorized in 1956 in Mr. Badcon’s class at Los angeles City College. That lesson related to funny money being printed on the full faith and credit of the United States and the housing bubble. We we all witnesses to how the world economy collapsed all because highly paid idiots in these top tier industries were encouraged to run amok and loan endless dollars to those totally unqualified for home loans. This destroyed the housing market, the employment debacle and auto industries, et al. They will never learn until such time as we go over the cliff which is the next big debacle coming our way because Keynsian economics” is still in even though it spells suicide.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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