WASHINGTON — Federal Housing Administration Commissioner David Stevens defended the agency's plans to rebuild its capital reserves without across-the-board down-payment increases.
Testifying at a hearing of a House Financial Services subcommittee Thursday, Stevens rebuffed calls for the FHA to raise its minimum down payment to 5%, saying the move would reduce FHA-backed loan volume by 40% and disqualify 300,000 first-time homebuyers.
Increasing required down payments for all borrowers would have "significant negative impacts on the broader housing market — potentially forestalling the recovery of the housing market and potentially leading to a double-dip in housing prices by significantly curtailing demand," Stevens said.
Instead, Stevens defended the FHA's plan to increase the up-front premium for most borrowers by 50 basis points, to 225 basis points of the loan amount, and asked Congress to grant the authority to raise a separate annual premium.
The hike to the up-front premium will take effect in April; Stevens said Thursday that the FHA would lower this premium to 100 basis points once the agency gained the power to raise annual premiums.
Raising down payments would generate only $500 million for the FHA, Stevens said, while the agency's proposals would bring in $5.8 billion.
Critics say it is too easy to get FHA-insured loans. Last year, Rep. Scott Garrett, R-N.J., introduced a bill that would require all FHA borrowers to put down at least 5%. Currently borrowers can receive an FHA loan with a down payment of as little as 3.5%.
In January, the FHA unveiled a plan to tighten underwriting standards. Borrowers with FICO scores lower than 580 would have to make a down payment of at least 10%. People with scores below 500 would be ineligible for FHA insurance.
In addition, Stevens on Thursday asked Congress to give the agency greater power to hold lenders accountable for nonperforming loans. Currently the FHA can make lenders indemnify it for losses on loans where there was an underwriting error or fraud. But Stevens said it has the explicit authority to do so only when the loan was insured through a process that accounts for just 29% of participating lenders. "FHA is simply requesting that Congress permit FHA to hold all lenders to the same standard."
The agency currently insures nearly 30% of home purchase loans and 20% of refinancings, but as recently as 2006, FHA-insured loans made up just 3% of the market. As credit from private sources froze during the downturn, the agency's role in the market increased but its risk management shortcomings became apparent. Last year the Department of Housing and Urban Development, which oversees the FHA, reported that the FHA's capital reserve ratio had sunk below its required 2%, to 0.53%.
Rep. Shelley Capito of West Virginia, the subcommitte's ranking Republican, has introduced an FHA reform bill that competes with the administration's. Her bill would incorporate many of the FHA's proposals but also strengthen the role of its chief risk officer.
"If we don't take steps necessary to shore up the FHA insurance fund, we will be facing another taxpayer bailout," she said at the hearing.
