Homebuyers insured by the Federal Housing Administration would have to provide more cash up front and meet higher credit scores under an Obama administration plan to protect the financially stretched agency.
Housing and Urban Development Secretary Shaun Donovan told a House committee Wednesday that the administration wants borrowers to have a stronger equity position on their loans. One possibility would be raising the current 3.5 percent downpayment requirement. Proposed legislation in Congress would raise the downpayment required to 5 percent.
Donovan also wants to reduce seller inducements, such as offers to pay closing costs, to no more than 3 percent of the purchase price. Donovan said the current 6 percent level creates incentives to inflate the appraised value of property.
The steps aim to get homeowners more invested in their property and therefore less likely to default on loans or, in Donovan's words, to make sure FHA borrowers have more "skin in the game."
While those measures are designed to better protect the FHA, it also would reduce the number of homebuyers and thus affect the economic recovery.
The agency offers insurance against default, but FHA losses have increased with the unemployment rate as more homeowners default.
"The loans FHA insures must be safe and self-sustaining for the taxpayer over the long-term," Donovan said. "With these reforms and others we will be considering, the administration is committed to ensuring that they are today -- and into the future."
Donovan is also asking Congress for authority to raise insurance premiums to build up the FHA's insurance fund as a hedge against economic uncertainty.
FHA's reserves have fallen to $3.6 billion, compared with $685 billion in outstanding insured loans for the fiscal year ended Sept. 30. That 0.53 percent ratio is far below the 2 percent threshold required by Congress.
"While its secondary reserve account has been depleted too quickly, FHA is not 'the next subprime' as some have suggested," Donovan said. He said delinquencies among borrowers with subprime loans are 240 percent higher than FHA's and that FHA relied only on traditional, 30-year fixed-rate mortgages.
He said the administration also plans to make sure lenders assume responsibility for any losses from loans that did not apply FHA underwriting standards.
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