FHA commissioner defends 3.5% downpayment

In response to congressional noise, the head of the Federal Housing Administration contended the other day that raising downpayment requirements or taking similar steps to limit the pool of eligible buyers for FHA-backed loans would hamstring a fragile housing recovery.

And, you know what, he’s right.

During a panel session of the Mortgage Bankers Association, according to the Wall Street Journal, FHA Commissioner David Stevens maintained:

“If it weren’t for this program, assuming that risk is being protected, this would forestall recovery of key metropolitan markets across the nation.”

Rep. Scott Garrett (R., N.J.) introduced legislation earlier this month that would require minimum downpayments of 5%, up from 3.5%, on loans backed by the FHA.

Concerns over the agency’s risk to taxpayers has grown in recent months after the FHA said that its estimated capital reserves would drop below federally mandated levels in recent weeks.

Although Stevens says that there’s no immediate risk of a taxpayer bailout, but critics suggest that a prolonged slump in housing prices could require the agency to ask Congress for money for the first time in its 75-year history.

The commissioner warned against “jumping to conclusions” and making credit standards tighter just as some signs show that housing is beginning to stabilize in certain housing markets:

“When I see members of Congress move a bill out that says raise it to 5% . . . I get very concerned.  It isn’t the down payment on its own that causes a default.”

Even an eggshell is less fragile than the current housing recovery, the persistence of which some economists are justifiably questioning.  You can read what others have to say about the recovery, the mortgage biz, household tips and both the U.S. and New York City housing markets in my free biweekly e-newsletter.

While easy credit doubtless caused the housing bubble to inflate (and not only related to subprime loans), getting any kind of loan today is harder than ever.  To ask folks at the brink of continued renting or buying for the first time to pony up more of a downpayment would force the country to plunge once again toward disaster.

Ironically, while writing this post, I received an e-mail from bank loan officer minutes ago saying that my multi-millionaire clients finally, after more than a month, were cleared to close on their new apartment with a mere $500,000 mortgage.

What more proof do we need that lenders are taking their time to scrutinize even the most routine loans, not only dotting every “I” and crossing every “T” but making borrowers jump through unimagined hoops?

So long as lenders exercise due diligence checking the financial wherewithal of their loan applicants, the risks of their default is minimized and the benefits to the housing market are maximized.

The credit crunch that almost everyone perceives these days is no mirage.  It’s a burden on even the most qualified of borrowers.

So, raising the FHA downpayment requirement is just crazy: It would tamper with the nation’s long-standing social policy of making home ownership a realistic goal for as many folks as possible and, even more important, condemn the housing recovery (and along with it, economic recovery) to doom.

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201


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