Proposed Bill Trying to Increase FHA Down Payment

A bill was introduced Monday, October 5th, 2009 attempting to raise the down payment requirement for FHA mortgages from 3.5% to 5%.  The FHA Taxpayer Protection Act – HR 3706 was proposed by NJ Rep. Scott Garrett.

Bills such as this seem counterproductive to our economic recovery.  One of the reasons for this bill is the rising delinquency rates on FHA loans, resulting in losses, and depleting FHA’s reserve’s (see: FHA’s Delinquencies are up).  The thinking is that the larger the down payment, the less likely the homeowner is to default.  Also, the more someone puts down, the less the loss is to the lender if the loan does default.

But what are some of the reasons that loans default?  The biggest reason is the loss of jobs.  Though it is true that people are more willing to let their house go when they’re upside down instead of accessing emergency funds.  So how does raising the down payment requirements that have been in place for decades prohibit people who lose their jobs from defaulting on their mortgage?

I think we should keep what we have in place.  The sooner the housing market bottoms and begins to rebound, the less likely FHA is to continue running through its reserves.  Not allowing people who have saved the down payment, have the credit, and make enough money to buy is counterproductive to our recovery.

-Matt Cady