RISMedia, May 27 2011— At a time when qualified home buyers are experiencing difficulty in obtaining mortgages because of overly restrictive underwriting requirements, the federal government needs to ensure that a reliable and adequate flow of housing credit is available through the Federal Housing Administration (FHA), according to the National Association of Home Builders (NAHB).
“If we look to the dramatic increase of FHA’s market share over the past few years, we can see how essential the program is for our nation’s economic recovery,” NAHB First Vice Chairman Barry Rutenberg tells the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity.
In 2006, when private lenders boasted a healthy market presence, FHA’s market share was at an all-time low of 2 percent. During the past two years, with the private mortgage market vanishing in a bad economy, FHA insured nearly 30 percent of the single-family mortgage market.
“This striking shift is evidence that FHA is performing its mission of providing the federal backstop to ensure that every qualified American home buyer has access to a stable mortgage product,” says Rutenberg.
As Congress looks for ways to reform the FHA, he urges lawmakers to proceed carefully in order to avoid consequences that could harm home borrowers. For example, NAHB is concerned that increasing the down payment from 3.5 percent to 5 percent—as called for in a draft legislative proposal—would create a substantial burden for all American home buyers, particularly younger buyers and those with strong credit profiles who lack the necessary funds to make the higher down payment.
“Research has shown that requiring a higher down payment does little to reduce risk of default but causes home buyers to use more of their reserves for the down payment,” says Rutenberg. “Sound underwriting is the key to minimizing foreclosures and defaults, not higher down payments. This is demonstrated by current FHA foreclosure reports on loans made to borrowers with sound credit profiles, which have significantly improved.”
Absent congressional action, the current limits for FHA insured loans and Fannie Mae and Freddie Mac mortgages are scheduled to be reduced on Oct. 1. Meanwhile, the same legislative blueprint that would increase FHA down payment requirements would impose additional reductions in loan limits for a significant number of areas throughout the country, a development that Rutenberg warns could leave a large number of first-time home buyers without a key source of mortgage financing.
“Counties across the country would see their loan limit reduced by tens of thousands of dollars, placing further downward pressure on home prices and impairing the ability of borrowers to use FHA-insured mortgages to purchase new homes,” says Rutenberg.
To keep FHA, Fannie Mae and Freddie Mac loan limits at their current levels, NAHB called on Congress to support H.R. 1754, the Preserving Equal Access to Mortgage Finance Programs Act, a bipartisan measure sponsored by Reps. Gary Miller (R-Calif.) and Brad Sherman (D-Calif.).
Meanwhile, the draft legislative proposal, which has not yet been formally introduced, would remove the limit on the annual mortgage insurance premiums on single-family home loans, even though the agency has already implemented a three-step premium increase and the strong performance of recent loans made under revised underwriting criteria makes a compelling case that a further acceleration of program premiums is not warranted.
“FHA’s capital resources are stabilizing and recovering. Allowing further, unlimited increases in the insurance premiums now would put unnecessary additional financial strains on potential home buyers,” says Rutenberg.
The legislative plan would also transfer rural housing programs within the Rural Housing Service (RHS) from the Department of Agriculture to the Department of Housing and Urban Development. NAHB opposes this proposed move because the RHS programs are uniquely structured to address the housing credit needs of low- and moderate-income persons in rural areas, which are very different from those found in urban and suburban areas.
“If the RHS single-family and multifamily programs were consolidated into existing HUD programs, it would make it more expensive for persons living in rural areas to obtain an affordable mortgage to purchase a home and more difficult to finance small properties in rural areas because HUD does not have a program that meets this need effectively,” says Rutenberg.
“As Congress looks to improve the FHA and RHS, these programs cannot be separated from the larger discussion of reforming the complex housing finance system, including future reforms to Fannie Mae and Freddie Mac,” he adds.
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