The Official Online Weekly Newspaper of NAHB
At a time when overly restrictive underwriting requirements are giving qualified home buyers a hard time in obtaining mortgages, the federal government needs to ensure that a reliable and adequate flow of housing credit is available through the Federal Housing Administration (FHA), NAHB First Vice Chairman Barry Rutenberg told a congressional panel on May 25.
"If we look to the dramatic increase of FHA's market share over the past few years, we can see how essential the program is for enabling housing and the nation’s economy to advance further down the road to recovery,” Rutenberg, a home builder from Gainesville, Fla., told the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity.
In 2006, when there was an abundant supply of mortgage finance from private lenders, FHA's market share was at an all-time low of 2%.
During the past two years, with private mortgage lenders growing increasingly more restrictive in reaction to a weak economy, the FHA insured nearly 30% of the single-family mortgage market.
"This striking shift is evidence that the FHA is performing its mission of providing the federal backstop to ensure that every qualified American home buyer has access to a stable mortgage product," said Rutenberg.
As Congress looks for ways to reform the FHA, he urged lawmakers to proceed carefully in order to avoid consequences that could harm home borrowers.
For example, NAHB is concerned that increasing the FHA’s downpayment requirement from 3.5% to 5% — as called for in a draft legislative proposal — would impose a substantial burden upon American home buyers, particularly younger and other credit-worthy buyers lacking cash to pay the higher upfront cost.
"Research has shown that requiring a higher downpayment does little to reduce the risk of default but causes home buyers to use more of their reserves for the downpayment," said Rutenberg.
"Sound underwriting is the key to minimizing foreclosures and defaults, not higher downpayments,” he said. “This is demonstrated by current FHA foreclosure reports on loans made to borrowers with sound credit profiles, which have significantly improved."
Meanwhile, the same legislative blueprint that would increase FHA downpayment requirements would impose additional reductions in loan limits for a significant number of areas throughout the country, a development that Rutenberg warned could leave a large number of first-time home buyers without a key source of mortgage financing.
"Counties across the country would see their loan limit reduced by tens of thousands of dollars, placing further downward pressure on home prices and impairing the ability of borrowers to use FHA-insured mortgages to purchase new homes," said Rutenberg.
To keep FHA, Fannie Mae and Freddie Mac loan limits at their current levels, NAHB called on Congress to support H.R. 1754, the Preserving Equal Access to Mortgage Finance Programs Act, a bipartisan measure sponsored by Reps. Gary Miller (R-Calif.) and Brad Sherman (D-Calif.).
Meanwhile, the draft legislative proposal, which has not yet been formally introduced, would remove the limit on the annual mortgage insurance premiums on single-family home loans, even though the agency has already implemented a three-step increase in premiums and the strong performance of recent loans made under revised underwriting criteria makes a compelling case that even higher premiums are not warranted.
"FHA's capital resources are stabilizing and recovering. Allowing further, unlimited increases in the insurance premiums now would put unnecessary additional financial strains on potential home buyers," said Rutenberg.
NAHB opposes this proposal because the RHS programs are uniquely structured to address the housing credit needs of low- and moderate-income persons in rural areas, which are very different from those found in urban and suburban areas.
"If the RHS single-family and multifamily programs were consolidated into existing HUD programs, it would make it more expensive for persons living in rural areas to obtain an affordable mortgage to purchase a home and more difficult to finance small properties in rural areas because HUD does not have a program that meets this need effectively," said Rutenberg.
"As Congress looks to improve the FHA and RHS, these programs cannot be separated from the larger discussion of reforming the complex housing finance system, including future reforms to Fannie Mae and Freddie Mac," he added.
To read H.R. 1754, click here and enter the bill number in the box at the center of the page.
For more information, email Scott Meyer at NAHB, or call him at 800-368-5242 x8144.