Proposal to Increase FHA Downpayment Voted Down in Committee

by Jann Swanson Mortgage News Daily April 29, 2010

On Tuesday the House Financial Services Committee approved a request by the Federal Housing Administration (FHA) to raise the ceiling on annual FHA mortgage insurance premiums from its current level of 0.55 percent.

FHA had requested the increase as one part of a plan aimed at shoring up its capital reserves which have dropped below the 2 percent required by law. The agency already raised the up-front premium charged to borrowers closing effective April 9. If the full Congress approves the annual increase, FHA will then shift some of the upfront premium to an annual premium to reduce the burden on borrowers at closing.

FHA says it intends to gradually raise the annual premium to 1.5 percent.

FHA revealed late last year that its current reserves are at .53 percent, but officials have said that their tightened lending requirements as well as the increase in premiums would allow them to restore the levels by collecting an additional $5.8 billion over the next few years. The Congressional Budget Office has put the number at a much more conservative $1.9 billion.

While approving the increase, the Committee defeated a proposal sponsored by Scott Garrett (R-NJ) which would have increased the minimum down payment for FHA guaranteed loans from 3.5 percent to 5 percent. It also would have prohibited sellers from participating in the buyer's closing costs and prohibited the inclusion of any initial services charges such as appraisal, inspections, and other fees in the principal amount of an FHA mortgage loan. The FHA has already reduced the amount that a seller can contribute to the buyer's closing costs from 6 percent of the loan amount to 3 percent. Garrett has also submitted separate legislation which would prohibit the buyer from rolling the upfront premium into the loan which would effectively increase the cash required of the borrower at closing.

Had the Garrett Amendment survived the Committee vote it could have had a considerable negative effect on the housing market. FHA guaranteed loans have historically been a minor factor in mortgage financing, but in the last few years, as credit tightened, the FHA was forced to increase its funding efforts up to 25 percent of all mortgage loans and an even high proportion of loans to first time home buyers.

Proposal to Increase FHA Downpayment Voted Down in Committee