The Federal Housing Administration (FHA), a sort of
lesser-known version of
Fannie Mae (NYSE: FNM) and
Freddie Mac (NYSE: FRE), wants you to know
that everything's cool as is, and will hear nothing of this
"lending standards" blather.
FHA, you see, backs mortgages with down payments as low as
3.5%. Since 3.5% is positively pitiful in an industry where
20% is the norm (and seeing how taxpayers are liable for
these loans), some members of Congress want FHA to up its
minimum down payment requirement to 5% ... still extremely
low, mind you.
But FHA commissioner David Stevens thinks that's rubbish,
telling the Mortgage Bankers Association, "When I see members
of Congress move a bill out that says raise it to 5% ... I
get very concerned. It isn't the down payment on its own that
causes a default."
Well, OK. I understand the fear of incoming regulation
gives people heartburn. But let's look at the facts. As I
notedearlier this summer:
Regression analysis compiled by a University of Texas
economics professor shows that being underwater is by far
the dominant cause of foreclosure. Factors that assign
prime borrower status -- such as credit scores, monthly
payments, and income -- aren't nearly as conducive to
foreclosure as whether a homeowner owes more than their
home is worth.
Low down payments = mortgages underwater = defaults. It's
pretty simple: When you have skin in the game, your chances
of, and incentive to, default diminishes.
Some will say, "Sure, but that alone doesn't prove FHA's
standards need to be overhauled. Maybe 3.5% works for them."
But
check this table out. Enough said.
As fellow Fool Dan Caplinger
wroteearlier this year, "It's too late to force existing
homeowners to pony up a big down payment to supplement their
home equity and get their mortgages back above water. What
weÂ
can do, though, is make sure
weÂ
don't repeat the missteps of the past ..."
Agreed. And when the FHA is on track to insure over $1
trillion in mortgages -- larger than
Bank of America (NYSE: BAC) and
Wells Fargo 's (NYSE: WFC) private mortgage
book
combined-- these aren't missteps anyone can afford
to take.
For related Foolishness:
Fannie and Freddie: One Year Later
Dangerously Delaying the Inevitable
The New Subprime
This article was originally published as
Prudence Just Ain't FHA's Thingon
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