Why blame the poor FHA loan?

Hundred dollar bills in shape of house

FHA loans are good options for home buyers with battered credit scores or who can't afford a down payment on a mortgage as large as many lenders now require.

But some congressional Republicans argue the low down payment requirement of as little as 3.5% has contributed to the country's foreclosure problem. The theory goes that borrowers who hold less equity in their homes don’t think they have much to lose if they default.

The House Financial Services Committee has drafted legislation that would increase the down payment on an FHA loan to 5% and ban borrowers from financing any of that down payment.

Of course, decaying underwriting standards were far more of a culprit in the housing crisis than were modest down payments.

Industry groups were quick to criticize the plan, announced in late May.

Those who are against the interest rate hike say that while it is true that down payment amounts are a factor in defaults, they are not the primary factor.

Said Ron Phipps, president of the National Association of Realtors:

"The correlation between down payment and loan performance is significantly less important than the linkage to strong underwriting, which FHA continues to have. FHA’s foreclosure rate remains less than conventional mortgages, so we don’t believe changes to the down payment would do anything but disenfranchise many creditworthy home buyers."

If Phipps is to be believed, this means qualified people will be frozen out of a market starving for home buyers.

Folks like Phipps believe that credit scores and debt-to-income ratios play more of a role in determining the likelihood of default.

They also argue the mortgage crisis was not caused by the more flexible standards of FHA loans but by lenders that did not have the borrower’s best interests in mind and who were quick to give a home loan to just about anyone.

At first glance, a modest increase to 5% would still make a Federal Housing Administration mortgage a better deal than you could find elsewhere.

But the Washington Post reported that raising the down payment would shut out 300,000 first-time home buyers next year. The paper also noted that an industry consultant claimed the changes are unnecessary because the FHA has raised its fees charged to borrowers by 60 percent in the last three years and demanded better credit scores.

So why solve a problem where there wasn't one in the first place?

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