A journey into Main Street economics.

FHA Taxpayer Protection Act of 2009

with 8 comments

Rep. Scott Garrett from New Jersey is introducing legislation to raise the minimum required down payment on Federal Housing Administration (FHA)-insured mortgages from the current level of 3.5% to 5%.

Garrett Introduces FHA Bill Requiring 5% Down Payment

“In addition to the 5% down payment requirement, an increase from the current required rate of 3.5%, Garrett’s legislation would also prohibit financing of closing costs under such mortgages, and require a Government Accountability Office (GAO) study of FHA fiscal soundness.”

Garrett questioned Ben Bernanke on the pros and cons of such a change to FHA-insured mortgages at a recent hearing on financial reform and good ol’ Ben didn’t disappoint by showing how much he really cares about the American public.

“I think it is undeniable that the FHA loans, because of a low downpayment, are riskier than other mortgages made and therefore have greater chance of loss which will be made up by the taxpayer and that trade-off is your trade-off in terms of what kinds of risk you’re willing to take.”
– Ben Bernanke

Translation: The Federal Reserve doesn’t pay taxes, so I don’t care how much money you common Americans lose by nationalizing subprime mortgage lending.

This makes Thursday’s House Financial Services Committee hearing on The Future of the FHA’s Capital Reserves all that more interesting. Given all of the money that will be lined up against passage of such legislation, I think this may be a more controversial topic than even the FTHB tax credit. Clearly something needs to be done to save the FHA from a calamitous situation which only gets worse by the day as they continue to hand out subprime mortgages at 3.5% down in an environment of rising unemployment and falling prices.

I don’t think raising down payments to 5% will solve much in the grand scheme of things, but at least it is a starting point considering how much public money is at stake. Then again, I’m sure passage of this act would be immediately followed by an extended home buyer tax credit with a larger dollar figure to lure in more first-time home buyers. When it comes to government, you usually have to give a lot to get a little.


Written by Myron

10/05/2009 at 11:32 PM

8 Responses

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  1. Myron —

    There is a difference between “foreclosures” and the loss of a loan and a “delinquencies” which create big claims against reserves.

    The FHA program is NOT anything like subprime lending — just look at the FICO scores, the lack of prepayment penalties and the steep up-front fees.

    Lastly, the proposed legislation would not JUST raise the down payment, it would raise the down payment AND require cash for closing costs that can now be financed. Thus the need for up front cash would not go from 3.5 percent to 5 percent, it would go from 3.5 percent to something much greater, depending on closing costs.


    Peter G. Miller

    10/07/2009 at 9:53 AM

    • Thanks for posting Peter.

      I agree about the closing cost changes being a huge mistake and it will probably result in more business for discount agents such as Redfin who offer rebates that can be applied towards closing.

      However, claiming that the FHA program is nothing like subprime lending is full of holes.

      Prime loans don’t have LTV’s over 95%.
      Prime loans don’t have DTI’s over 45%.
      Prime loans aren’t given to borrower’s with 620 FICOs.

      From the HUD website: “Unlike conventional loans that adhere to strict underwriting guidelines, FHA-insured loans require very little cash investment to close a loan. There is more flexibility in calculating household income and payment ratios.”


      The delinquency rates for FHA mortgages are rising rapidly and the current problem is FHA reserves. They can’t continue to operate in the same manner and expect different results in the future.

      This is a decent start to fixing some of FHA’s problems, but FHA insurance premiums are going to have to go up to cover the risks they are taking.


      10/07/2009 at 10:23 AM

  2. The question is not what prime loans have or don’t have, the MBA figures address the real issue, which is the level of foreclosures.

    Delinquency rates are rising rapidly for many forms of financing because the unemployment rate is going up. This is not an FHA problem, it is a generic economic issue. The same is true with prime and Alt-A loans.


    Peter G. Miller

    10/07/2009 at 11:06 AM

    • From MBA: http://www.mortgagebankers.org/NewsandMedia/PressCenter/70050.htm

      “While the foreclosure starts rate for FHA loans at 1.15 percent is lower than all other loan types with the exception of prime fixed-rate loans, the FHA percentages have remained low due to a large increase in the number of loans outstanding, the so-called “denominator effect”. If the number of FHA loans had stayed the same as a year ago and we saw the same number of foreclosures, the FHA foreclosure rate would be almost 1.5 percent.”

      The numbers are troubling on their own, but are even worse than reported due to them taking on so much of the market share for the past couple of years. The result is short-term dilution of foreclosure rates.

      The reason it isn’t a general economic issue is that these loans are government guaranteed at the end of the day. Private subprime lending had no such guarantee, although one could argue the bailout did exactly that.

      Although the trend lines for prime foreclosure and delinquency rates are rising rapidly, the actual rates don’t come anywhere near subprime. The quote above explains why FHA foreclosure rates seem low right now which is why the delinquency rate is the more accurate measure of FHA loan performance at this time.

      FHA loan performance is clearly better than subprime, but that’s not really much of an accomplishment in my book.

      Since you’re a broker, out of the FHA loans you’ve handled this year… can you estimate the percentage of truly stable borrowers that won’t be underwater in 5 years if the market drops ~5-10%?


      10/07/2009 at 11:53 AM

  3. I am not a mortgage broker, I am a reporter.

    You miss the point. The reason FHA volume has increased is because so many private-sector subprime and ALT-A lenders have failed, thus giving the FHA additional marketshare.


    Peter G. Miller

    10/07/2009 at 11:55 AM

  4. Says who?

    Do you understand that there is a difference between lenders and the FHA, which is an insurance plan?

    Are you aware that the FHA sent more than $13 billion to the Treasury under the Bush Administration, borrower premium money that should have been kept in the reserve fund?

    Do you think the $13 billion might now be useful if it had been kept in the reserve fund, where it belongs?

    See: http://www.realtytrac.com/contentmanagement/realtytraclibrary.aspx?channelid=8&itemid=4898

    In other words, we have an engineered crisis. one that would not exist if the FHA program had not been tampered with in the first place.

    Peter G. Miller

    10/08/2009 at 10:06 AM

    • We’re not arguing causality though. The issue at hand is the FUTURE of the FHA, not the past. And yes, I’m fully aware of the difference between lenders and the FHA.

      There’s simply no way around some level of future losses to FHA reserves and the supporting documentation behind the testimony today is frightening. I plan on making a full detailed post about this at some point today, so let’s continue this debate after the hearing if you still disagree about the FHA’s problems.

      I am in 100% agreement with you that the FHA isn’t “the problem” with the mortgage industry. I wasn’t aware of the $13 billion figure and thanks for the link, but even $13 billion won’t enough to save them if housing turns down again.

      Their entire reserve forecasting model is based upon house prices falling no more than 8% from here and then going above and beyond the peak bubble prices within the next 7 years. I can’t imagine how budgeting for a best case scenario will turn out well, but it’s probably easier to do that when you’re backed by the taxpayer.


      10/08/2009 at 10:46 AM

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