Even as the government tries to clean up after the housing excesses of the past few years, The Wall Street Journal opines (subscription required) that it's also sowing the seeds of a new housing bust with Federal Housing Administration loans.
FHA loans are federally insured mortgages made available to first-time home buyers. They require down payments as low as 3.5% (but it's really less because closing costs can be rolled in) and a credit score of just 620 -- far below the 700+ required by most private lenders right now.
As the subprime market has completely dried up, marginal home buyers are returning to the FHA, leading to a huge increase in FHA loan volume. Nearly a third of mortgages are FHA loans, up from just 2% in 2006.
Just like every other type of mortgage, FHA default rates are on the rise. But I don't share the Journal's concern about FHA, and here's why: Unlike the subprime sludge of the past few years, the vast majority of FHA loans currently being sold are fixed-rate mortgages and all require full documentation of income and assets. The inflation that will likely ensue over the next few years makes these fixed-rate loans very low risk because borrower's incomes will rise as their mortgage payments remain flat.
That said, I think there are a couple common-sense steps that can be taken to make sure that the FHA poses less systemic risk: Raise the minimum down payment from 3.5% to 5%. On a $200,000 house, that's only $3,000, an amount that can easily be saved by waiting a few months to buy and living frugally. The home owner will be rewarded with greater equity and there will be less risk to taxpayers in the event of a default.
Secondly, there is simply no reason not to require a higher credit score. Raise the 620 to 650, and let people with scores that are too low pay down credit card debt for a few months before buying a home.
The FHA provides a valuable service, allowing first-time homebuyers to achieve the American Dream of homeownership. But there are relatively mild steps that can be taken to reduce the risk of defaults without making homeownership substantially less accessible.
That said, I think there are a couple common-sense steps that can be taken to make sure that the FHA poses less systemic risk: Raise the minimum down payment from 3.5% to 5%. On a $200,000 house, that's only $3,000, an amount that can easily be saved by waiting a few months to buy and living frugally. The home owner will be rewarded with greater equity and there will be less risk to taxpayers in the event of a default.
Secondly, there is simply no reason not to require a higher credit score. Raise the 620 to 650, and let people with scores that are too low pay down credit card debt for a few months before buying a home.
The FHA provides a valuable service, allowing first-time homebuyers to achieve the American Dream of homeownership. But there are relatively mild steps that can be taken to reduce the risk of defaults without making homeownership substantially less accessible.
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Reader Comments (Page 1 of 1)
5-04-2009 @ 1:34PM
Iridium said...
Raising the downpayment to 5% would require $10,000 on a $200k house. Far more than most first time homebuyers can save.
The only way a young person can save up enough money for a house is to live with thier parents for a few years while working a career job. A prospect that doesn't sit very well with many parents out there.
5-16-2009 @ 9:41AM
Gile83 said...
What you have to remember is this, not everybody in this world makes 75K+ every year. There are those of us out there that live in small rural areas where the job market doesn't pay as well. We make enough money to pay our bills and live our lives. But we sure as hell don't want to have to save every penny just to get a downpayment, 3.5% is low enough to let people like me into a home we can afford. Now i am not saying that theres not stupid people out there that jump into homes they can't afford, because theres probably hundreds of thousands a day. But the point is, what about people like me? Tough shit, i don't think so. I am person trying raise a family and keep my family safe and healthy. So before you just look at a Credit Score as a number, maybe you should remember that not everybody out there that has a moderate credit score is a loser that doesn't pay his/her bills.