A bill introduced in Congress Monday would increase the minimum down payment for Federal Housing Administration (FHA)-insured mortgages from 3.5% to 5%.
The FHA Taxpayer Protection Act of 2009 — HR 3706 — would also prohibit financing initial service charges, appraisals, inspections, or other fees or closing costs with any part of an FHA mortgage.
The bill’s author, Rep. Scott Garrett (R-NJ), said the current policy of allowing closing costs to be rolled into the mortgage effectively reduces FHA down payments to as low as 2.5% because borrowers don’t have to have as much cash on hand at closing.
“[T]he benefits of promoting homeownership using government subsidies must be balanced against the potential risk of insuring less creditworthy borrowers and exposing the American taxpayer to that risk,” Garrett said in a statement on his Web site. “As we have learned repeatedly throughout the mortgage crisis, the amount of equity a homeowner has in their home directly correlates to the credit risk associated to their mortgage.”
The bill also calls for the Government Accountability Office (GAO) to conduct a review of the FHA’s fiscal stability and the state of the Mutual Mortgage Insurance Fund, including the appropriate capital ratio of the fund, and how that ratio affects broader housing market. The bill also calls for an examination of the housing market’s dependence on the fund since the mortgage crisis began.
The market share of FHA mortgages has increased from 3% in 2006 to more than 20% in 2009, and the rate of delinquency for FHA loans is also on the rise, currently more than 14%, according to testimony Department of Housing and Urban Development (HUD) inspector general Kenneth Donohue gave to Congress in April.