House Republicans have proposed a bill to "strengthen FHA" by raising the minimum down payment for FHA loans from 3.5 percent to 5 percent.
They also want to prohibit FHA borrowers from financing their closing costs and to lower the limits on FHA loans (FHA's maximum loan limits are already scheduled to fall in October. The bill suggests making them even lower).
If approved, the bill could significantly increase the upfront costs of buying a home with an FHA mortgage.
But if you are on the market for a home and have just finished saving enough money for a 3.5 percent down payment, there is no need to panic -- yet.
The proposal is just a draft at this point and is expected to face great resistance when legislators start discussing it Wednesday during an Insurance, Housing and Community Opportunity Subcommittee hearing.
Ron Phipps, president of The National Association of Realtors, a strong opponent of the bill, is scheduled to testify during the hearing.
He says NAR supports "reforms to strengthen the program" but "changes should not be made at consumers' expense by drastically impacting the affordability and availability of mortgage capital."
A higher down payment requirement would only increase "the number of creditworthy borrowers ineligible for home ownership and does little to reduce risk of default," he says.
Proponents of the bill say by having more skin in the game borrowers would be less likely to default, which would help improve FHA's finances and protect taxpayers.
Yeah, too bad they are a few years and some $700 billion late.
Why didn't legislators think of introducing this bill in say, 2004, when FHA was insuring mortgages for lenders who gave out loans with their eyes closed? Maybe it's because they were too busy pushing for the Zero Downpayment Act of 2004.
Ironically, on March 24 2004, members of a former housing subcommittee sat in the same room where this bill is scheduled to be discussed Wednesday, and talked about why they thought FHA should insure loans with no down payments.
This is a statement John Weicher, who was then Assistant Secretary for Housing and Federal Housing Commissioner at HUD, made on that day:
Under this new program, FHA will insure 100 percent of the cost to acquire the home for first-time home buyers. We would allow them to finance the full purchase price, as well as all of the closing costs. Potential home buyers would not have to make the minimum down payment of 3 percent that is required in our regular Home Mortgage Insurance Program.
Studies have consistently shown that the single biggest obstacle to homeownership for most families is the inability to come up with enough cash to meet down payment and closing costs. Many potential home buyers pay the equivalent of a monthly mortgage in rent, but are unable to save toward a down payment on a home. … This Administration is committed to helping all Americans address this barrier to homeownership. … We are proud of this effort, and we are proud of the results.
And he had plenty of other proud supporters. Here is the transcript if you're in the mood.