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This Goober Wants to Raise FHA Down Payment to 5% from 3.5%

More than a month ago on Monday, October 5, The FHA Taxpayer Protection Act of 2009 - HR 3706 - authored by Rep. Scott (Goober) Garrett (R-NJ) was introduced to Congress.

If passed It would increase the minimum down payment for FHA insured mortgages from 3.5% to 5% and the law would prohibit financing FHA closing costs. BUT WAIT there is more!

One tiny fact looms large and questions the Congressman's competence to propose any laws governing FHA is that FHA already no longer allows closing costs to be computed in the loan amount. This changed last year. See FHA Regs 4155 page 35

This ill advised, poorly researched, legislation will not help our recovering market or even our future mortgage stability. FHA is not the culprit or even one of the culprits in the recent mortgage fiasco. That blame lies at the feet of sub-prime mortgages and Wall Street greed.

FHA, with a 3% downpayment had been stabile source of financing for almost 80 years. Actually, because closing costs used to be computed in the loan the previous LTV was more like 2.25%. The minimum down payment was recently increased to 3.5%.

If you feel Congressman Garret's bill must be defeated then email your congressman at: Congressional Email

P.S. I know it serves no intelligent purpose to Gooberize Congressman Scott but it makes me feel good.

Your FHA Guru Bill Ladewig

800.664.7283 (SAVE)

Bill@YourFhaGuru.com

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Bill Ladewig is a Mortgage Broker Licensed by the California Department of Real Estate 00968137

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Posted by Bill Ladewig Your FHA Guru - FHA and VA Loans Since 1970 on 11/15/2009 01:34 PM

Comments (49)

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Originally posted at: Bill Ladewig's Blog: This Goober Wants to Raise FHA Down Payment to 5% from 3.5%

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49 Comments on This Goober Wants to Raise FHA Down Payment to 5% from 3.5%

OCT

And don't forget it includes prohibiting the seller to pay any closing costs for the buyer, basically adding another 3-5% to a buyer's costs.

Hi Sheree. I know that is part of the bill and previously we included closing costs in the down payment calculation but FHA down payment has been a flat 3.50% of the sales price since January of this year.

Hi Bill, thank you for sharing this informative article with us.

John Pusa

John, it is my pleasure.

Bill - This is just another example of how the feds are completely out of touch with the American public. I am not in favor of sweetening the incentives for first time home buyers, but what is the point to making it tougher?

I read the bill. It does not prohibit seller paid closing. In fact, it doesn't mention that section of the law. It prohibits buyers from financing any portion of their closing costs.

Hi Mark, I think it is just a matter of a light weight politician trying to be noticed. Unfortunately this type of grandtanding stupidity often actually turns into law.

Hi Lenn, thanks for your comment. There are lots of rumors floating around and you are absolutely correct Seller Paid Closing Costs were never part of this bill.

Yep, let's just make it even harder for someone who needs FHA financing. What silliness. Thank you for the information.

I'm a Texas Loan Officer, been in the business for 16 years.

This legislation would devastate our already fragile economy.

Where is NAR on this one?

I'm helping folks get in to home that have saved for a few years just to come up with the 3.5%.

What a freaking idiot this guy is. I will contact him as well. I encourage you to also email everyone you know outside of AR to put a stop to this stupid idea.

I just sent this to everyone I know, maybe we can get an email address too?

I agree with Mark, it's just one more example of ignorance on the politician's part. There are so many of them out there that have no problem with spouting, "You know what you need...." without ever looking to the people in that business.

Ridiculous!

Melissa, you are the greatest. I looked for his email address but could only send him something from his site. But I think a phone call is much better because by tying up his line and staff he has to pay attention.

Richard, you are correct Congressman Scott was probably just interested creating a little recognition. Love your logo.

Bill- I re-blogged this, hopefully I did it right, if now let me know & I will try again :)

OCT

If they would just stop messing around and get some facts before they change thing. That would be change I could believe in.

What a frightening new twist. Clearly this man is out of touch with the economy and the majority of the population's needs.

Bill - My personal opinion is whom ever is to blame should pay and I think the United States Government had their hand in the cookie jar also!

Vegas Bob

I wish the Government would stop playing with the market. Keep it simple but do not make it impossible for people to purchase a home.

FHA is facing potential disaster according to the Wall Street Journal. They say that FHA is in danger of falling below its 2% reserve requirement. The article goes on to say that "If its reserves fall short, the agency is obliged to notify Congress, which could spark a commotion over the extent to which the government is funding losses in the housing market. Some housing analysts have said that losses might lead to the FHA pulling back lending, which has helped boost flagging housing demand."

Over the past two years, the number of FHA insured loans has soared from 2.7% to 23% and rising defaults have eaten through FHA's cushion. Approximately 7.8% of FHA mortgages were 90 days late in the second quarter according to the Mortgage Bankers Association. That's up from 5.4% a year ago.

There might be some method to the madness over at FHA. Perhaps, just perhaps they are just trying to cover their rear end.

From what I've read, and who knows what's true these days, FHA loans have a higher risk of default, ostensibly because there is not enough skin in the game. I suppose the logic is if you put more down, defaults would go down. While this may be true because of the law of big numbers, if I were philosopher king, you'd have to weigh that benefit with the cost to society of fewer home transactions - and that cost to society may be even greater.

Tough call. I don't do FHA loans so I don't have that specific emotional aspect as part of my reaction, but I certainly do have emotional reactions to many other bits of legislation which impacts conventional loans - and there are more of those than FHA. A lot of them really p*ss me off.

I feel the pain...

P.S. this is an emotional issue - that's not a dirty word...we are all emotional - that's just how we're wired...

What this market needs now is a long period of stability. Changing lending guidelines is almost always a "too late reaction" to some other excessine practice which creates a problem. We need lenders and banks in general to focus on what really matters, credit worthiness of the borrowers, and to leave the shifting standards alone. Underwrite, underwrite, underwrite but quit moving the targets.

OCT

Thanks for bringing this up Bill.

There are other things that could be done in lieu of increasing the minimum down payment. When I see companies bragging about doing sub 600 scores and ratios above 50%, it makes me wonder. I think they could visit guidelines like this before increasing the down payment requirments. If the customer can't afford the home or has a history of defaulting on credit, it really doesn't matter how much skin they have into it. I really don't think another 1.5% is going to save them or prevent a customer from defaulting.

Bob, in my opinion, this bill was introduced by a two-bit backwater hack trying for recognition. He did not even do his homework. A section of his bill disallows including closing costs in FHA loans and that has been over for at least a year. Down-payments are now calculated at 3.5% of the purchase price or appraisal whichever is lower. Closing costs are not a factor.

Hmmm maybe my description is a little harsh. Naw, let it stand.

It is pathetic that American lives and livelyhoods are at the mercy of his elk.

OCT

Bill - Gooberize all you want. If it walks like a duck, well I'm sure you get my meaning.

I am concerned that the government is making it too difficult for home buyers. I must admit that I agree with many of the new lending requirements but America still needs a home buyer plan like FHA. Too many people that can afford a house will not be able to buy homes.

Most politicians don't accept e-mail from anyone outside their district.

E-mail YOUR OWN CONGRESSPERSONS, all three of them, one House and two Senate members. If they hear enough, it could help.

One Congressperson can only introduce a bill. It still has to be voted on by the remaining members.

Bob, I bet if someone pinches that birdbrain he may quack.

Lisa, FHA is a good program and has worked for almost eighty years. When there is an environment where people are losing their jobs and can't pay their mortgages, where property values drop and people walk away from their mortgages then all loan programs are going to show higher than normal default. FHA doesn't need fixing the economy needs Fixing.

Lenn, Excellent, you are correct and I should have supplied a link to find their email addresses... Duh

Here it is: http://www.visi.com/juan/congress/ and I corrected my blog to include the address.

Thanks Lenn, you're the best.

As they say, what is he thinking..... Good Article.

FHA insurance was originally set up to serve the under-served. It was designed many years ago because most people could not save up 20% down - long before the advent of PMI companies. I see so many comments on AR that FHA is "sub-prime". The truth is FHA loans are - and always have been - full documentation loans - cross every "t" and dot every "i". People are forgetting that much of the reason for FHA defaults lies with the unemployment situation. Until that problem is solved we will continue to see defaults on all loan types no matter how much down payment rules are changed.

A lot of comment here but only one has mentioned FHA is on the brink of financial problems. If it falls below the reserves mandated 80 years ago larger problems could arrise. Hopefully, this will open some eyes and get things on track without going to an extreme. Surely unemployment numbers have much to do with it and now 25% past the 8% obama promised and rising is a concern of all lenders. That 'hope & change' thing is not working and wasting more money is not going to help. The US is in a 'pay now or pay more later' situation and needs a leader that is non-existant today.

Here we go again...government involevement that will hurt more than help.....why, why, why,

OCT

Bill I agree with you. The program is a good program along with VA & USDA. If we stop the sub-prime loans and then get our jobs back then the foreclosures & defaults will take care of themselves. Without a steady job market we will continue to see defaults but it seems that Congress only wants to do quick fixes to improve their standing at home and not concentrate on long term, steady fixes.

By the way I heard that Congress just approved a 5% pay raise for themselves. Do you think they are feeling the pain like Main Street? Just wondering.

NOV

BRAVO Jane (#28). The reason FHA is experiencing more defaults is because unemployment is skyrocketing. When compared to other loan products, FHA defaults rates are actually lower than other loan products defaults rates. When people stop losing their jobs then they'll stop losing their homes too.

Bill I am also forwarding this to my fellow LO's and my broker. We need to let Congress know that this is not the way to address rising foreclosure problem.

A few more nails for the coffin we call real estate. Raising the amount of a down payment is going to kill the market.

NOV

Our poor legislators...I know they are overworked, reading all those words they try to pass into law...what?...the bill is not even written before they pass it? Do tell. Let's fire the lot of them and start afresh. Maybe the next batch will read their job description before they start voting.

We better get used to it. . after the shock of sub prime. . .they will start looking at us

Thanks for that excellent note... He needs to be gooberized right out of office! Hopefully we will hear some good news this week with the extension of the credit. Trickle down and help alot of people!

Appreciate this important post, but on a lighter side, I must ask what is a goober?

You are right on the money Bill. The FHA program is fine as it stands!

Bill,

Sometimes you just gotta' do it!

I will email my congress people and reblog.

Thanks!

Bill, Thanks for this important post. My first communication to legislators will be an opinion on the right thing to do. My second communication will be on election day!

Thanks!

Janice, a goober is a kind of backwoods, Gomer Pyle type of guy but not as bright.

Bill, if it ain't broke don't try to fix it :o)

Judi, thanks you are the best.

Anthony, Great! I am glad to be of small part of your first legislative communication and hope it is the first of many.

NOV

Hi Bill...I agree that this guy is a goober. But I think there is confusion about the closing costs. That provision you mentioned merely prevents a lender from seeing the money for closing costs as a "down payment" or money-out-of-pocket to satisfy the 3.5%. It does not prevent an FHA buyer from "financing" closing costs by adding it to the loan and then asking for a seller credit....that's a different thing.

When is rains it pours, it's all about (GREED)!

VB ;o)

Good information as always. 90%+ of my sales are FHA or USDA loans so the lower they keep the downpayment the better.

Good information as always. 90%+ of my sales are FHA or USDA loans so the lower they keep the down payment the better.

Increasing the down payment 1.5% isn't going to stop defaults, it'll just price some 1st time homebuyers out of the market. We have to be careful not to get too conservative.

NOV

Bill,

Everybody and his nephew is now trying to fix the real estate mess to get their name up there and most of it, if passed, will just muddle the scene even more.

NOV

This is just more proof of government's Law of Unintended Consequences. What difference will it make how much down payment a person has in their home if the market declines significantly, and the buyer loses their job?

If a person put 10% down 15 months ago in our market they are now upside down in the home. If they become unemployed they will probably lose that home. The only difference is if they had used FHA with only 3.5% down, they might have some money in their savings to get them through the unemployment period without losing the home!