By Clarence Walker, NewsBlaze Business Writer
In an effort to ramp up more low-to-middle income first-time homebuyers, the Obama Administration and the FHA (Federal Housing Administration), a program that is a U.S. government-run mortgage lender, recently passed a new proposal allowing first-time home buyers to take advantage of paying only 3 percent down to buy a new home.
Under FHA, first-time homebuyers also benefit from FHA’s reduced Monthly Insurance Premiums (MIP) that is included with mortgage payments, thanks to President Obama’s Administration that ordered the mortgage insurance premiums cut by 0.5 percentage points to 0.85 percent of a loan balance. This saves an FHA homeowner over $900 dollars per year, according to Obama’s proposal.
The new requirement allowing 3 percent down, according to an analysis by Moody’s Analytics shows that the reduction will assist approximately 45,000 families to purchase a home this year, plus an additional 100,000 families in 2016.
Since 2010, insurance premiums on low down payment mortgages soared to 145 percent to help the struggling FHA raise funds to restore the agency’s heavily depleted reserves. Overall there have been growing complaints over the excessive increases of costs imposed upon people although FHA was created to help lower income Americans to own a decent home.
“This action will make home ownership more affordable for over two million Americans in the next three years,” said Julian Castro, who currently serves as White House Secretary over the Department of Housing and Urban Development (HUD).
“Since 2009,” Castro announced during press statements, “the Obama Administration has taken bold steps to reduce risks in the mortgage markets, and to protect consumers. These efforts have made it possible to take this prudent measure while also ensuring FHA remains on a positive financial trajectory.”
FHA’s new 3 percent downpayment for first-time homebuyers with less than excellent credit and assets has sparked controversy not only among the housing industry but also in Congress.
While Congressional Democrats highly favor the new FHA program to help low-income people to own a home, Republican lawmakers oppose the idea over concerns that lower mortgage premiums could put the government at risk if borrowers default into large numbers of foreclosures, similar to the housing crisis that took place between “2007-2009,” a crisis that eventually contributed to plunging the U.S. economy into recession.
Worried about another possible housing crisis like the one during Obama’s first term that caused millions of foreclosures and financial instability among banks and lending corporations, Republicans held a series of hearings called “The Future Of America” beginning on February 11, 2015.
The hearings focused on thoroughly examining the FHA’s financial stability to slash annual mortgage premiums and allowing 3 percent down for first-time homebuyers. Texas Republican Jeb Hensarling, Chairman of House Financial Services Committee held the hearings.
Republican lawmakers grilled Urban Secretary Julian Castro to explain why the FHA mortgage reduction will not increase the chance of a taxpayer bailout further down the road. In his testimony, Castro explained that FHA’s lower mortgage premiums will not have a meaningful impact on the financial health of the FHA, “will not alter FHA’s positive trajectory, and will not materially lengthen the amount of time it will take for FHA to return to the mandatory two percent capital reserve ratio.”
“We believe this is striking a very good balance between being fiscally responsible and also enhancing homeownership opportunities,” said Secretary Castro, during a heated moment before the Finance Committee in Washington D.C.
Mortgage Insurance Premiums (MIP), help FHA to cover losses when homeowners default and foreclosures fail to recover costs. MIP coverage is required when borrowers’ down payments are less than 20 percent of the price of a home.
Since 1934, FHA loans have helped millions of Americans to own homes, and now with more significant changes to the FHA program in 2015, count on tens of thousands more citizens to grab the opportunity to enjoy the success of the American Dream by owning an affordable home.
Today’s housing market, where conventional lenders require consumers to pay higher down payments including having a high credit score and, in some cases, conventional lenders require additional assets as collateral. By contrast, since FHA only requires consumers to pay 3 percent down to own a home with a lower credit score between 580 and 700, FHA loans are in demand.
For example, under the new FHA rule, a consumer can pay $6000 down and buy a $200,000 home, or pay $3000 down and buy a $100,000 house.
“Some first time homebuyers will be able to qualify using an FHA loan versus a conventional loan, due primarily to the methodology for determining qualification,” says Becky Walzak, in an email statement sent to Newsblaze.
Walzak is President of RJBWalzak Consulting, a firm specializing in financial services and risk assessment, based in Deerfield Beach, Florida. Walzak also said that potential customers need to know that FHA includes the calculation of residual income in their analysis.
“Therefore items such as insurance, child care, food and clothing are part of the determination of the borrower’s ability to pay,” Walzak explained.
“The problem with the 3 percent down payment program is when it is offered to consumers with marginalized credit,” said Bankrate.com Chief Financial Analyst Greg McBride, during an interview with NewsBlaze.
“The (FHA) program,” McBride explained, “is available to borrowers with credit scores as low as 620.” (One news report pegs the score at 580). “Poor credit and a lack of savings track record is a recipe for homeownership disaster,” McBride pointed out.
McBride further said, “A 3 percent down payment for a consumer that otherwise has a strong credit profile, verifiable income, and a modest debt ratio is a more solid proposition.”
Carla Blair-Gamblian, a Home Loan Consultant for Veteran United Home Loans in Columbia Missouri, sheds a different light, favoring FHA’s 3 percent down program for first-time homebuyers. “Not everyone can qualify for a conventional loan, so comparing (conforming loans) to FHA loans across the board may not yield the best picture of which loan product is best,” Blair-Gamblian, concluded.
Chris Polychron, President of National Association of Realtors said in a New York Times article, that based on research conducted by his Association, the percentage of first-time buyers using FHA loans decreased to 39 percent, down from 56 percent over the last four years.
“While an FHA-backed mortgage with a FICO 580 is theoretically available to borrowers, many lenders add ‘overlays’ on these minimum requirements,” said Keith Gumbinger, Vice President of HSH.com, located in Riverdale New Jersey.
“Loans with the lowest credit scores tend to default at a much higher rate, and lenders are afraid that if they issue too many loans that fail later, HUD(Housing Urban Development) will no longer allow them to write FHA-backed mortgages,” Gumbinger stated on HSH.com
Low Income Earners Unable To Afford FHA Fees
News media reports indicate that over time the FHA has increased premiums since 2011 to offset losses caused by astronomical defaults on mortgages that were backed by the FHA following the collapse of the housing industry over eight years ago. Housing experts have said the increases of annual fees, at one point reached as high 1.35 percent of the loan balance. At 1.35 percent, this amount actually knocked buyers out of the market who earned modest income.
“Lots of people have been locked out of the market, particularly lower-wealth borrowers and borrowers of color by the high prices at FHA” said Julia Gordon, Director of Housing Finance And Policy at the Center for American Progress.
“The premium cut,” says Gordon, “does put homeownership within the reach of more people.”
Will FHA Finances Sustain a Profit To Prevent Future Taxpayers From Paying Taxes To Recoup FHA Losses?
Democrats and housing industry specialists make it clear that FHA’s reduced fees will increase the agency’s bottom line because it will boost the volume of lending, which had declined considerably when homebuyers paid more to get a loan. A recent study by Mortgage Bankers Association said the premiums increase dramatically reduced the value of the insurance fund by $4.4 billion, as higher costs forced away credit qualified borrowers.
Republicans have also argued during Congressional hearings that FHA premium cuts should be completely off the table due to the FHA’s insurance fund remaining way below legally required levels.
“A broke FHA is a broken FHA,” said Jeb Hensarling, Chairman of House Financial Services Committee.
“FHA has a portfolio of poor quality loans,” says Mark Calabria, a Cato Institute Director of Financial Regulation Studies. “This (3 percent down) will end up costing the taxpayers considerably,” Calabria added.
Financial Committee Republicans ordered the FHA to maintain enough cash to cover all projected losses in its $1.1 trillion portfolio. FHA insurance fund drew down $1.7 billion from the U.S. Treasury Department, and the fund posted its first positive balance in two years during fiscal 2014.
“FHA loans will always have a place in the market whether their costs rise or fall,” stated Home Loan Consultant Blair-Gamblian.
Everyone needs a home, despite opposition leveled against the Obama Administration that is ready and willing to gamble on giving 3 percent mortgage loans to low-income families who need it the most.
Any comments or questions? Contact NewsBlaze Reporter Clarence Walker at: [email protected].