“While there is no question that larger down payments correlate with better loan performance, down payments only tell part of the story”
-Acting FHA Commissioner, Bob Ryan

Insufficient down payments were called out as one of the many culprits behind the recent housing market collapse. Now with the qualified residential mortgage definition open for comment, down payment requirements for home loans are again a hot topic of discussion.

Federal regulators have proposed setting a 20 percent down payment requirement for QRMs. While discussion is certainly underway of whether a 20 percent down payment is needed or overstated, folks in the industry are frankly scared of what a 20-percent requirement could do to an already-fragile housing market.

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If you want to know the difference between conventional mortgages and Federal Housing Administration (FHA) financing, the first item up for discussion is typically the cost of each loan.

For instance, the Wall Street Journal tells us that “conforming mortgages, or those that can be bought by Fannie Mae or Freddie Mac, commonly require higher down payments than FHA loans require. The catch to an FHA-insured loan is that you’ll pay more in fees.”

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In terms of this blog — in 2009 alone, it started out with warnings that the subprime market would return. When the below-prime market did return, it found a home with loans guaranteed by Federal Housing Administration (FHA). From there our coverage morphed into blog posts that skeptically documented the FHA’s growing balance sheets. Soon after, we flat out knew that the FHA was going to cost us (taxpayers).

Earlier this month HSH President Paul Havemann presented the exact scenario that would cripple the FHA’s lending abilities. Paul warned that “If [the FHA's] reserves falls below the minimum, either FHA will have to get out of the loan-insurance business until it improves… or Congress will have to shore up the FHA reserves with cold, hard cash.” The minimum for the FHA’s reserve fund must stay above the required level of two percent.

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When the nation’s banks invested heavily in the private mortgage market, taxpayers were left to pay the $700 billion tab it has taken so far to clean up their mess. Now, with about 8,500 federally-insured banks again investing heavily in the shaky American mortgage market, who do you think will be left to pick up that tab when or if that market collapses? Ding, ding, ding — you guessed it — the American taxpayers!

During the housing boom, the mortgage-backed securities in which the large banks invested in were chock full of subprime and poorly-underwritten loans. Since the collapse of the housing market, lenders have ceased writing new subprime loans or any which can’t be easily sold. All the way back in January we predicted that a lender or lenders would eventually come along to cater to the under-served, “non-prime” audience. That lender turned out to be the Federal Housing Administration (FHA), a.k.a the Federal government.

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HUD has made good on their promise to investigate and crack down upon the fraud permeating through the FHA loan market. Yesterday, HUD announced sanctions against more than 120 FHA-approved lenders.

Click here for the complete list of sanctioned lenders and their violations.

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