Can Borrowers Save the System?by Tim Manni
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?