Garrett Introduces FHA Bill Requiring 5% Down Payment
Washington,
Oct 1, 2009 -
Rep. Scott Garrett (R-NJ) is introducing legislation today to require borrowers under Federal Housing Administration (FHA)-insured mortgages to make down payments of at least 5%.
Garrett’s bill, the “FHA Taxpayer Protection Act of 2009” is aimed at shielding taxpayers from the risk that the FHA portfolio presents. 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. In the Housing and Economic Recovery Act (HERA), Congress set the FHA down payment requirement at 3.5% and allowed closing costs to be included as part of that number. This effectively allowed FHA down payment levels to be as low as 2.5%.
“Homeownership is a noble goal,” Garrett said. “However, the benefits of promoting homeownership using government subsidies must be balanced against the potential risk of insuring less creditworthy borrowers and exposing the American taxpayer to that risk. As we have learned repeatedly throughout the mortgage crisis, the amount of equity a homeowner has in their home directly correlates to the credit risk associated to their mortgage. In trying to find a reasonable balance between the current, extraordinarily low level and a level that would ensure a significant reduction of risk to the taxpayer, I am introducing legislation to increase the FHA down payment requirement to 5%.”
This morning, appearing before the House Financial Services Committee, Federal Reserve Chairman Ben Bernanke, stated, “Given the low down payments, there is greater risk of loss there, which will be borne by the taxpayer.”[1] By raising the down payment requirement to 5% and studying the challenges presented by the increased leverage ratio, Garrett believes Congress can begin to address the main concerns with the solvency concerns of the FHA. By raising the down payment requirement to 5% and studying the challenges presented by the increased leverage ratio, Garrett believes Congress can begin to address the main concerns with the solvency concerns of the FHA.
The proposed GAO study would attempt to determine the current fiscal state of the FHA, the appropriate capital ratio that should be maintained in order to ensure financial soundness, the effect of the capital ratio on mortgage insurance programs and the exposure of the taxpayers as a result of obligations of the FHA, the effect of the capital ratio of the FHA on the broader housing market, and the extent of the increase in which housing markets are dependent on mortgage insurance provided through FHA since the beginning of the financial crisis.
Many have expressed concern with the risk the FHA poses to taxpayers, especially with the recent disclosure by FHA Commissioner David Stevens that the capital ratio of a key reserve fund dropped below the 2% Congressionally-mandated level. The risk to the taxpayer is real, as Office of Management and Budget (OMB) Director Peter Orszag noted when he observed that FHA loans have accrued $15 billion in losses over recent years. Orszag also dispelled FHA claims that the agency “costs the taxpayers nothing”[2] by stating, “Over the past few years, the program has been anything but costless.”[3]
Inspector General Kenneth Donohue outlined the growth in FHA market share from 3% in 2006 to over 20% in 2009, stating, “the current degree of FHA predominance in the market in unparalleled.”[4] This growth in market share is especially troubling considering the increased rate of delinquency for FHA loans, which is now over 14%.[5]
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Additional resources:
CRS Report (March 11, 2009) Treatment of Seller-Funded Downpayment Assistance in FHA-Insured Home Loans http://garrett.house.gov/UploadedFiles/CRS_May_26_2009_FHA-Insured_Home_Loans_An_Overview.pdf
CRS Report (July 22 2008) Overview of Federal Housing Assistance Programs and Policy http://garrett.house.gov/UploadedFiles/CRS_July_22_2008_Overview_of_Federal_Housing_Assistance_Programs_and_Policy.pdf
Journal of Housing Research (2008) “Skin in the Game”: Zero Down payment Mortgage Default
http://garrett.house.gov/UploadedFiles/Journal_of_Housing_Research_2008_Skin_in_the_Game_-_Zero_Downpayment_Mortgage_Default.pdf
Journal of Real Estate Literature (2008) Mortgage Termination At Risk: A Review of Recent Literature http://garrett.house.gov/UploadedFiles/Journal_of_Real_Estate_Literature_2008_Mortgage_Termination_At_Risk.pdf
