Administration (FHA) is rapidly running out of money as approximately 30% of mortgage loans are now issued through the FHA. With its low down payment requirement of 3.5% and its willingness to work with high credit risk borrowers, the FHA has been the first and last stop for borrowers wanting to take advantage of the current low interest rates and home prices. Traditionally the FHA has assisted home buyers who are not able to be served by conventional lenders, but as credit has contracted for all consumers in 2009, the market for federally guaranteed and subsidized mortgage loans has expanded. In this expansion lies increased political scrutiny of the FHA and increased concern that a pre-emptive policy strike is needed to prevent a future bailout of this government agency.
Some of the issues being raised concern the low down payment requirement by the FHA along with the government’s new homebuyer tax credit. Critics are concerned that the combination of 3.5% down and a new tax credit equal borrowers who will be able to take out mortgage loans with virtually no money down and thus will have little incentive and little to lose should they default on their loan. There is legislation pending that will require 5% down for all future FHA loans, but the outcome of this legislation and its ability to prevent defaults is in question. Some are even proposing a minimum of 10% down, but opponents say that this will defeat the purpose of the FHA and its intention to serve low-income, high-need, first-time home buyers.
Another aspect that makes mortgage loans issued through the FHA so attractive is that is allows sellers to pay up to 6% of buyers’ closing costs. Again the argument is that this is creating another avenue for buyers to obtain loans and a home they can’t really afford, and the suggestion is on the table to reduce this amount to 2%. No one wants to see the FHA and it’s mortgage program fail, and no one wants to see more borrowers unable to make their mortgage payments and in risk of foreclosure. There is a fine line to walk in extending credit to those who need it and making sure that those who need the credit can afford it.
Our housing market is in real trouble, and the Federal Housing Administration will need to do something so the reserves they have fall within the required congressional guidelines. The price of our failing economy seems to rise every day with every headline, and the question still remains as to the real costs of economic recovery and who will ultimately be paying the price.
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