I don't know about you, but I am all for raising the minimum down payment required for a house loan that is insured by the Federal Housing Administration.
A new bill introduced two weeks ago in the House of Representatives would increase the down payment to 5 percent from 3.5 percent.
The bill also would bar borrowers from using FHA loan money to cover their closing costs.
But the Fed's $8,000 tax credit this year for first-time buyers would still allow some of that $8,000 to cover closing costs. The tax credit expires Nov. 30, unless President Barack Obama signs a bill to extend it.
Only last year, lawmakers raised the down from 3 percent, a level that had stood for 74 of the FHA's 75 years in business.
I could hardly believe that. So I contacted my old friend Moishe Pipuk, the know-it-all in almost every category under Mars.
"True, my friend," Pipuk responds. "When the Congress formed the FHA in 1934, its aim was to help every American buy his or her home with little down.
"After all, we were still in the Great Depression. Who had money, even for a 3 percent down payment?"
Until 1934, mortgage loans were nearly impossible to get. Banks required a 50 percent down payment and most loans had to be repaid in 5 years.
"Now the FHA doesn't actually make the loan," Pipuk explains. "It only insures the loan if and when the borrower defaults. This means the FHA would pay the lender for its losses.
"This greatly reduces the risk to the lender. In exchange for this insurance, the FHA demands that lenders make loans more affordable and easier to obtain."
But where is the FHA getting the money to pay off bad loans, I ask the Great One.
Pipuk is quick to reply. "The FHA does not require taxpayer revenue to support its cause. All money for default payments used to come from insurance fees charged the borrower over the life of the loan," my man says.
"But with the explosion of foreclosures last year and this year, the FHA is looking at the Treasury for a bailout, just like everybody else in dire straits."
Pipuk seems to be right on the mark in that respect.
Lawmakers pushing for the increased down payment argue the move is needed quickly to stem rising defaults and foreclosures on FHA-guaranteed loans. Rep. Scott Garrett (R-New Jersey) is the bill's main sponsor.
Pipuk tells me the government now is most concerned that the FHA's cash reserves shortly will dip below its legally mandated level of 2 percent of FHA-backed loans.
My friend tells me he has "looked it up" and finds the following startling statistics on the FHA's current financial health:
- The rate of serious delinquencies jumped to 7.5 percent in the second quarter of 2009, a 16 percent rise since the beginning of the year.
- The Treasury and the Federal Reserve pumped a total $1.2 trillion investments into the U.S. mortgage market in fiscal 2009, according to the Federal Housing Finance Agency.
- Another three quarters of a trillion dollars is available, if necessary, Edward J. DeMarco, acting director, New England Mortgage Bankers, recently told his colleagues in Providence, RI. DeMarco said the huge cash infusions to Fannie Mae and Freddie Mac "will play a critical role in bringing some measure of liquidity to the mortgage market."
Edward DeMarco
- By the fiscal year's end on Sept. 30, the Treasury had given Fannie Mae and Freddie Mac $96 billion in cash for preferred stock shares and another $181 billion to purchased under-performing mortgage-backed securities from the firms.
- The Federal Reserve has paid $885 billion for mortgage securities, most of them issued by Fannie or Freddie, and also has given the two agencies $131 billion to buy up their debt obligations.
Ben Bernanke
He told Congress recently, "It's the only source of mortgages where down payments can be less than basically 20 percent. And so it is providing mortgage access to a large number of people who could not-otherwise buy homes."
Tied in with Bernanke's view is an alert from Freddie Mac vice president Chris Bowden. Bowden advises prospective buyers of Freddie Mac's foreclosed properties that bids need to be in by Oct. 30 to collect on an offer that will cover part of the sale's closing costs.
Buyers must close on their homes by Dec. 31 to qualify for the closing cost discount.
By meeting the deadline, home shoppers "could save potentially thousands of dollars in transaction costs when they buy a 'Home Steps' home" from the agency.
I tell Pipuk all his numbers and data have left me dizzy. They have also left me more convinced than ever that Congress should raise the home down payment to at least 5 percent.
The bill comes to a vote in November. Stay tuned.
And that's the way I see it - for now.
(Please see related article, New FHA Condo-Buying Rules Rile Realtors and Builders, Oct. 19, 2009)
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