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It is no secret that the FHA is under pressure from law makers to increase reserves to avoid a taxpayer bailout. Due to loan defaults in recent years, the FHA has seen its Mutual Mortgage Insurance Fund (cash reserve) dwindle to 25% of the congressionally mandated level. In addition, the FHA market share has increased 5-fold since 2005 exposing the taxpayer owned company on a level that was never intended. The most recent push is to increase the minimum down payment from 3.5% to 5.0% which would add an additional $500million to the agency's cash reserves. The agency's critics believe the additional cash investment from borrowers will make them less likely to default on their loans and combined with the additional $500million will reduce the likelihood of a taxpayer bailout. Interesting to note that Fannie & Freddie recently came to the conclusion that down payment was not the determining factor in failed loans but that debt-to-income ratio is the most common factor. You got to love our elected officials.

FHA Commissioner David Stevens told a House subcommittee Thursday such an increase could have undermined the housing market and lead to a double-dip in home prices. Stevens countered the pressure for additional down payment by pointing to the increase of the up-front mortgage insurance from 1.75% to 2.25% (effect April 5) along with the new proposals to require a 10% down payment from borrowers with credit scores below 580 and an increase to the annual mortgage insurance, paid monthly, from .50% to 1.5% would raise 8-times the capital for the MMI fund. In addition, reducing the allowable seller contributions from the current 6% to 3% would function as additional cash investment from the buyer as a counter to the suggestion that additional down payment would make a buyer less likely to default.

The message is clear. The FHA is in an unsafe position and will be forced to continually tighten credit to protect its programs, the Mutual Mortgage Insurance Fund and ultimately the taxpayers who own it!

FHA borrowers and sellers of property that might attract first time home owners should consider the potential of future changes in FHA guidelines in their timeline.

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