From Dina El Boghdady in Monday’s Washington Post:
“A Republican-led proposal circulated Monday would boost the down payment requirement for mortgages backed by the Federal Housing Administration, a move some industry experts said would shut potential home buyers out of the market.”
Presently, the minimum down payment on an FHA mortgage is only 3.5%. The program was designed to allow homeowners without a lot of money for a down payment to become homeowners. The program worked quite well for many years, but after the housing crash, the FHA became a very popular source of funding for home loans, and teh FHA was/is insuring far more homes than the program was ever really designed to handle. In 2005 and 2006, FHA mortgages made up about 3% of mortgage originations. This number rose as high as 20% of the market in 2009. As a result of this increase in business as well as an increase in defaults, the FHA’s cash reserves fell below the 2% that is congressionally mandated.
The new proposal from Republicans would raise the minimum down payment from 3.5% to 5%. Republicans claim that this would force borrowers to have more skin in the game, and would reduce defaults and rebuild the FHA’s cash reserves. The proposal has not been introduced as actual legislation. According to the article the FHA Commissioner David Stevens said last year that raising the minimum down payment to 5% would reduce FHA loan volume by 40% and cause 300,000 first time home buyers to be unable to afford a home.
A similar attempt to raise the FHA minimum down payment was defeated in Congress last year. I can see both sides of this issue. On the one hand, it would damage an already weak housing market. On the other hand, it would probably shore up the FHA, and possibly encourage more responsible lending. I would like to see something like this enacted, but phased in slowly over a ten year period or so. My thought would be that in ten years, we will hopefully be in a better economic position, especially in terms of the housing market. There would be no drastic changes, just incremental changes that wouldn’t really have a huge impact in any one year. It seems like a good compromise to me. What do you think? Let me know in the comments below.
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