Congressman Drafts Bill to Increase FHA Downpayment

Republican congressmen are becoming more concerned about the Federal Housing Administration's financial plight and they want to increase FHA's downpayment requirement to 5%. Rep. Ed Royce, R-Calif., said FHA is operating at the same dangerous leverage ratios that led to the takeover of Fannie Mae and Freddie Mac. Rep. Scott Garrett, R-N.J., said he has drafted a bill that would increase the FHA downpayment requirement to 5% from the current 3.5% level. "There are increasing reports of the likely necessity of a taxpayer bailout for the FHA and this legislation aims to implement reforms to try to prevent such a bailout from occurring," Rep. Garrett said at a House Financial Services Committee hearing. The Garrett bill also calls for a General Accountability Office study to determine the appropriate leverage ratio for FHA. In the early 1990s, Congress mandated that FHA maintain a minimum 2% capital ratio. A recent audit shows that the federal mortgage insurance fund has fallen below the 2% minimum. But FHA officials say the insurance fund should be able to maintain a positive capital position and FHA will not need taxpayer assistance.

I must say that should this occur, it will further damage a fragile housing growth as home buyers already stuggle to provide the current 3.5% down payment.  What we really need is a zero-down FHA product with strict guidelines such as increased up-front mortgage insurance, higher credit score, stable income, and adherance to standard ratio guidelines. Given that, the success of an FHA zero down product would more likely.

I suggest a preemptive letter to your congressman and/or senator expressing your feeling how an increase to 5% in down payment would affect the housing industry. Currently, almost 50% of all loans closing are FHA and my feeling is there would be a significant drop should buyers need to come to the table with more cash.