Higher FHA Down Payment Opposed

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A proposal to raise the minimum down payment on an FHA mortgage to 5 percent is drawing strong opposition among those in the mortgage and real estate industries.

Representatives of the Mortgage Bankers Association, National Association of Realtors and NAHB all testified this week in opposition to legislation prepared by the House Financial Services Committee that would increase the minimum FHA down payment from its current 3.5 percent.

The measure, titled the FHA-Rural Regulatory Improvement Act of 2011, would also prevent borrowers from rolling their closing costs on FHA loans into the loan itself. Since closing costs on an FHA mortgage typically equal another 2-3 percent of the loan amount, the legislation could more than double the minimum amount a borrower would have to come up with to obtain an FHA mortgage (5 percent down plus 2-3 percent in closing costs, vs. 3.5 percent down with closing costs rolled into the loan currently).

The measure, developed by the committee’s Republican majority, seeks to strengthen FHA finances and guard against future taxpayer bailouts by imposing more stringent requirements on those seeking an FHA mortgage. The measure also seeks to attract private capital into the mortgage market by reducing the some of the advantages offered by government-backed loans.

Other Factors Called More Important

However, those from the industry associations argued that the changes would squeeze many potential borrowers out of the market while not significantly reducing the risk of mortgage defaults.

“We should not be placing such a high emphasis on just one factor in determining a loan product’s overall risk, said Michael Berman, chair of the Mortgage Bankers Association, testifying before a House Financial Services subcommittee on Wednesday. “While down payment has an impact on default, other factors, including full documentation of income and borrower credit, can mitigate this risk.”

In testifying, Berman and others alluded to the fact that the FHA default rate has been lower than that of conventional loans, despite the relatively minimal down payment requirements.

Seven Years To Save Up Down Payment

Ron Phipps, president of the National Association of Realtors, told the subcomittee his organization calculates that it would take an average American family nearly seven years to save the $10,000 needed to put 5 percent down on a $200,000 home and 10 years to cover a 10 percent down payment.

“The current 3.5 percent down payment and closing costs represent a significant financial commitment,” Phipps said. “Requiring a larger down payment does little to reduce risk of default compared to strong underwriting requirements and only puts home ownership out of reach for many families who have the income necessary to carry the cost of the home purchase.”

Expressing a contrary view, Michael Calabria of the free-market advocacy Cato Institute, argued that low down payments were a major factor leading to high levels of mortgage defaults. He urged that the 5 percent minimum down payment be implemented immediately for FHA loan, with a 10 percent down payment required for borrowers with FICO credit scores of 680 or less.

The draft legislation has not been formally introduced and so does not have a bill number, but is presently being put forward as an item for debate.

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