The Federal Housing Administration’s loan guarantee program remains critical to the nation’s economic recovery, the National Association of Realtors said today in urging Congress to refrain from raising FHA minimum downpayment requirements.

FHA insured nearly 30 percent of purchase loans in 2009, including more than half of mortgages taken out by first-time homeowners, and NAR also wants lawmakers to make temporary increases in FHA loan limits in costly housing markets permanent.

But rising claims have eroded FHA’s capital reserves below statutory limits, forcing the program’s administrators to tighten underwriting requirements and raise upfront mortgage insurance premiums.

Some critics charge that the program has become "the next subprime," and say more needs to be done to limit the FHA’s losses.

There’s concern that FHA became a haven for loan originators who made risky loans during the housing boom, and that rising claims will require a taxpayer bailout. Since its founding in 1934, FHA’s mortgage insurance program has been funded entirely by premiums paid by borrowers.

There’s also concern that the government’s increased market share could hamper the recovery of private mortgage insurers, many of whom have also taken losses that have forced them to tighten underwriting standards and threatened their ability to take on new business

Charles McMillan, a Texas-based broker and NAR’s 2009 president, said FHA has sufficient reserves and controls in place to manage risk, and that lawmakers should not force FHA to raise minimum downpayment requirements from 3.5 percent to 5 percent.

Testifying on behalf of NAR before a hearing of the House Financial Services Committee, McMillan also:

  • Questioned FHA’s plan to require 10 percent downpayments from borrowers with credit scores below 580.
  • Asked Congress to grant FHA’s request to raise the cap on annual mortgage insurance premiums so that FHA can roll back upfront premiums.
  • Questioned a proposal to reduce maximum allowable seller-paid concessions from 6 percent to 3 percent. McMillan said reducing the maximum allowable seller concession will be especially difficult for borrowers in states where closing costs are high, such as Texas, New York and Florida.
  • Asked lawmakers to make permanent temporary loan limits that allow FHA to insure mortgages up to $729,750 in high-cost markets. The limits are currently scheduled to expire at the end of the year.
  • Wants to restore the spot loan-approval process for condominiums, and relax the condo approval process by eliminating a 50 percent owner-occupancy ratio requirement that has temporarily been reduced to 30 percent.

A bill introduced by U.S. Rep. Scott Garrett, R-N.J. — HR 3706, the "FHA Taxpayer Protection Act of 2009" — would increase FHA minimum downpayments for all borrowers to 5 percent, and prohibit borrowers from financing upfront mortgage insurance premiums and closing costs into their loan.

In his prepared testimony, McMillan said NAR is strongly opposed to the bill, because increasing downpayment requirements would disenfranchise borrowers but do little to help FHA build its reserves.

The bill, introduced on Oct. 1, has 29 co-sponsors and has been referred to the Financial Services Committee.

In his written testimony, FHA Commissioner David Stevens said raising the minimum downpayment requirement to 5 percent would raise $500 million a year, but reduce FHA loan volume by 40 percent.

That would translate into more than 300,000 fewer first-time homebuyers, with "significant negative impacts on the broader housing market," Stevens said, including the possibility of a double-dip in housing prices caused by a significant curtailment of demand. …CONTINUED

Stevens said FHA has stepped up lender enforcement, strengthened credit and risk controls, updated appraisal guidelines, and proposed a rule to increase net-worth requirements for all FHA lenders.

Those moves, along with changes to the way mortgage insurance premiums are collected, will raise an additional $4.1 billion a year, with "a much more moderate impact on the broader housing market," Stevens said.

Although FHA will raise upfront mortgage premiums from 1.75 percent to 2.25 percent on April 5, it plans to roll upfront premiums back to 1 percent if lawmakers grant it the authority to raise annual premiums, which Congress has capped at 0.55 percent.

Stevens said if Congress raises the cap on annual premiums, FHA plans to charge borrowers annual premiums of 0.85 percent for mortgages with loan-to-value (LTV) ratios of up to 95 percent, and 0.9 percent for loans with higher LTVs.

McMillan said NAR generally supports FHA’s efforts to strengthen the program, but is "not convinced that all of these changes are necessary."

NAR is taking issue with a plan to require borrowers with credit scores between 500 and 579 to make minimum downpayments of 10 percent, and cut off borrowers with scores below 500 altogether.

NAR "does not condone making loans to borrowers who are unable to repay the loan, or are at significant risk to not repay the loan," McMillan said. But credit scores are not a "perfect indicator of risk," and the move could have a "disparate impact on minorities," he said.

Citing reports by the Federal Reserve and the Federal Trade Commission, McMillan said African Americans and Hispanics — and also borrowers under 30 — have lower credit scores than whites and Asians.

Credit outcomes for a given credit score including measures of loan performance, availability and affordability also differ among demographic groups, he said.

"The disparate impact of credit scores on minority groups flies in the face of the mission of FHA to serve underserved markets," McMillan said.

Stevens said FHA "is far and away the leader in helping minorities purchase homes" with 51 percent of African-American homebuyers and 45 percent of Hispanic families who purchased homes in 2008 using the program.

Only 6 percent of FHA’s current loan portfolio would have been subject to the proposed changes, Stevens said.

With the improved quality of recent FHA loans, about 1.5 percent of mortgages insured by FHA in 2009 would have been excluded under the proposed credit-score requirements, which FHA intends to implement this year, Stevens said.

NAR also advocates a continued role for FHA in high-cost markets, endorsing a bill to make permanent the temporary increases in loan limits approved by Congress for Fannie Mae, Freddie Mac and FHA after the secondary market for "private label" mortgage-backed securities collapsed in the second half of 2007.

The bill, HR 2483, the "Increasing Homeownership Opportunities Act," introduced in May 2009 by Brad Sherman, D-Calif., has 46 co-sponsors and has been referred to the Financial Services Committee.

Citing a recent HUD report, McMillan said only 3 percent of FHA loans are above $362,750, and less than 2 percent are above $417,000. Eliminating the temporary increases in loan limits would reduce the availability of mortgages in 612 counties in 40 states, he said.


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