FHA Loans

The head of the Federal Housing Administration warned that raising down payment requirements or taking similar steps to limit the pool of bad credit home loans that lead to increased loan defaults and foreclosures.

Rep. Scott Garrett (R., N.J.) introduced a measure in Congress earlier this month that would require minimum down payments of 5%, up from 3.5%, on loans backed by the FHA. But Mr. Stevens 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,” he said. “It isn’t the down payment on its own that causes a default.”  Mr. Stevens’ strong defense of the FHA’s current role in the marketplace drew applause from the otherwise muted audience of mortgage bankers, brokers and other industry personnel during the trade association’s annual meeting.

The FHA has seen its market share balloon since the subprime mortgage market collapsed more than two years ago and led most private investors to exit the mortgage market. The New Deal-era agency’s standards were seen as too strict during the heyday of subprime lending because it required borrowers to document their incomes and pay minimum down payments, but today it remains one of the last sources of low down-payment loans.  FHA home loans continue to gain market-share in the absence of alternative home financing programs. 

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. Mr. 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.

Mortgage-industry executives also exhorted industry colleagues not to back off of efforts to modify loans given early “glimmers of hope” that housing is reaching a bottom. “It is an awesome task that is in front of us,” said Charles “Ed” Haldeman Jr., the chief executive of Freddie Mac. He warned that there could be “increasing softness” in housing in the coming months. “It would be a real mistake to be too confident about a return to normalcy,” he said

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