The Federal Housing Administration has been taking a lot of flack lately from government and market officials for letting its Capital Reserves fall below the federally mandated rate of 2 percent. Now Congress is investigating whether it needs to force the FHA to make some major changes to its mortgage loan programs.
FHA home loans have traditionally been a source of funding for first-time homebuyers and those with lower credit scores or little down payment money. When the credit markets crashed last year, more and more borrowers came flocking to such loans as private lending dried up. The result was FHA-backed mortgages went from making up 3 percent of the market share in 2006 to more than 30 percent this year.
The FHA says that such a rapid increase left the organization understaffed and unprepared to handle such a jump in loan volume.
Well now that the FHA is in trouble, several different rule changes are being proposed. These include:
- Increasing the down payment requirement from 3.5 percent to 5 percent.
- Increasing the upfront insurance premium from 1.75 percent to 3 percent.
- Decreasing the amount that sellers can contribute to buyer closing costs from 6 percent to 3 percent.
Housing and Urban Development secretary Shaun Donovan did not commit to any single option yet, but said, “We have made the decision to exercise our authority to increase the up-front cash that a borrower has to bring to the table in an FHA-backed loan — to make sure that FHA borrowers have more ‘skin in the game’ and a stronger equity position in their loans.”
He also made it clear that, “FHA is not ‘the next subprime’ as some have suggested.”
While Donovan may not be particularly excited about changing the down payment requirement, some statistics provided on Capitol Hill suggest that those who put more down are more likely to keep up with their loan payments. In fact, one U.S. representative said that those who put no money down were twice as likely to go into default on their loans than those who put just 5 percent down.
Whatever the new regulations may be, Donovan says his group will weigh the decisions carefully.
“We are contributing substantially to the recovery in the housing market and any of these changes that we will make, we will be very careful about potential negative impact on the market,” he told reporters. “There is a balance we have to strike between making credit available and ensuring we are doing it in a responsible way.”