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Bill Raises Required Down Payment to 5% for FHA Loans

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A bill introduced in Congress Monday would increase the minimum down payment for Federal Housing Administration (FHA)-insured mortgages from 3.5% to 5%. The FHA Taxpayer Protection Act of 2009 — HR 3706 — would also prohibit financing initial service charges, appraisals, inspections, or other fees or closing costs with any part of an FHA mortgage. The bill’s author, Rep. Scott Garrett (R-NJ), said the current policy of allowing closing costs to be rolled into the mortgage effectively reduces FHA down payments to as low as 2.5% because borrowers don’t have to have as much cash on hand at closing. “[T]he benefits of promoting homeownership using government subsidies must be balanced against the potential risk of insuring less creditworthy borrowers and exposing the American taxpayer to that risk,” Garrett said in a statement on his Web site. “As we have learned repeatedly throughout the mortgage crisis, the amount of equity a homeowner has in their home directly correlates to the credit risk associated to their mortgage.” But Scott Stern, CEO of the Lenders One mortgage cooperative, a group of independent mortgage lenders, expresses a different take on the issue. Stern said the down payment requirement for FHA loans has been consistent for years before the mortgage crisis, and the FHA program worked well. Instead, he said, it was the layering of risk, including questionable product terms, prepayment penalties and unsound adjustable-rate mortgages (ARMs) that led to the rise of foreclosures. “The biggest barrier to homeownership for a typical FHA borrower is the down payment. When you add the down payment, plus closing costs, plus escrows, you’re probably talking about 5 to 6 to even 7% of the loan, depending on the closing costs,” Stern said. “Raising the down payment won’t make the loans any safer, it will just make it harder for people to buy, and that is not what we need right now.” The bill also calls for the Government Accountability Office (GAO) to conduct a review of the FHA’s fiscal stability and the state of the Mutual Mortgage Insurance Fund, including the appropriate capital ratio of the fund, and how that ratio affects broader housing market. The bill also calls for an examination of the housing market’s dependence on the fund since the mortgage crisis began. Congress sets the capital ratio of the fund, which is currently at 2%, but FHA Commissioner David Stevens disclosed the capital ratio of a key reserve fund dropped below that level, Garrett’s statement said. HousingWire previously reported on Stevens' initiative to change the FHA's credit policies ahead of the ratio drop. The market share of FHA mortgages has increased from 3% in 2006 to more than 20% in 2009, and the rate of delinquency for FHA loans is also on the rise, currently more than 14%, according to testimony Department of Housing and Urban Development (HUD) inspector general Kenneth Donohue gave to Congress in April. Write to Austin Kilgore.

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