There is a new bill being introduced that would increase the minimum down payment for FHA loans from 3.5% to 5% (HR 3706).
I understand that some congressman want to protect the financial stability of HUD as well as the American people. The last thing we need is a bunch of FHA foreclosed homes on the market.
However, I don’t believe this is the answer. Yes, that sounds pretty bias considering the fact I’m a mortgage loan officer and my job is to help people get loans, but the loss of 100% financing never scared me and my business has only grown since the market has downturned.
First, let’s answer some very simple, profound questions. Why do FHA loans exist? Who were they made for?
FHA loans were created in the early 1930′s to help boost the economy during the worse time in our country’s financial history, the Great Depression. It was really quite a brilliant idea. The government designed a loan program where banks write loans that are insured then purchased by the Federal government. The government will insure the loans so if the owner defaults, the government covers part of the losses. To cover these losses, the government charged the homeowners a premium called “mortgage insurance”. Then, the government bought the loans as bonds and sold them to investors. This freed up the lenders assets and could make a profit with minimal risk. This system is the cornerstone for today’s mortgage market.
Today, FHA has recreated itself into the same vital tool it once was. In the worse economic state since the Great Depression, FHA has become a major lifeline in the housing market helping millions of americans obtain homeownership. FHA represents more than 50% of the financing used today for first time home buyers. Personally, FHA buyers represent more than 50% of all my applications, which is amazingly high considering how many people are looking to refinance with today’s low rates.
I’m sure the supporters of this bill in congress worry there will be a high number of defaults putting the government’s money at risk. However, I’ve watched both the total amount of foreclosures in my area and how many FHA foreclosed homes come on the market. Hundreds and hundreds of new homes go into default each week, yet the website that shows FHA foreclosed homes only shows a handful of homes for sale in the 3 major counties in Western Washington.
By pure marketshare alone, there’s no question we’ll see more FHA foreclosures in the future. That said, the majority of FHA loans originated today are fixed rate loans. Even the ARM’s (Adjustable Rate Mortgage) are some of the safest ARM’s offered today with low adjustment caps and low margins. These are loans that were designed to succeed, not fail like the subprime loans of the past.
I know the extra 1.5% extra down payment doesn’t sound like much, but to a first time home buyer, it’s already a stretch to save that much money to put down. Tightened guidelines in other areas would make more sense, but putting more money down is not the answer.
I once heard a quote that fits this situation perfectly.
“If it’s not necessary to change, it’s necessary not to change”.
-Lucious Cary
