Millions of homebuyers to pay more for FHA mortgages

WASHINGTON — Millions of homebuyers in the United States will have to come up with more cash and reach higher minimum credit scores to get a government-backed mortgage under changes announced by the Federal Housing Administration (FHA).

Some loans might require more than the current 3.5 percent minimum down payment, but the Obama administration is resisting calls for an across-the-board increase. Instead, it is looking at other ways to increase the amount of cash at closing, such as requiring borrowers to pay more of their mortgage insurance premiums upfront.

The FHA, which insures mortgages with low down payments, is scrambling to balance its increasingly important role in propping up the housing market with faltering finances of its own that could require a government bailout.

The agency's share of home loans has surged from 3 percent in 2006 to nearly 30 percent this year as credit has tightened and borrowers' bank accounts have been depleted. But that increased exposure has led to more defaults, driving the FHA's reserves below their mandated levels.

"We've learned from recent history that the market is fragile, and we have to plan for the unexpected," Housing and Urban Development Secretary Shaun Donovan, who oversees the agency, said at a House hearing Wednesday.

Details of the changes announced Wednesday weren't expected to be finalized until next month. Donovan said officials wanted to carefully design them to avoid damaging the budding housing recovery.

But he said the Obama administration was considering increasing the minimum 3.5 percent down payment required for an FHA-backed mortgage in some instances, such as for people with lower credit scores, and is seeking congressional authority to raise the premium for mortgage insurance.

Donovan told the House Financial Services Committee that the expanded role of the FHA is only temporary until the mortgage financing market recovers, and he doesn't want to steer the agency away from its traditional role of helping lower-income people with solid jobs buy their first homes.

FHA-backed loans plunged during the housing boom earlier this decade as buyers flocked to easier-to-get and cheaper subprime mortgages. The FHA focuses on traditional 30-year fixed-rate mortgages and requires documents verifying income.

"Homeownership should be available to responsible borrowers ... and we have to keep in mind FHA's historical role of doing that," Donovan said.

But some lawmakers are concerned that the FHA, which is funded by mortgage insurance premiums paid by borrowers, will need an infusion of government money as even its traditional loans face increased defaults because of rising unemployment.

The agency is supposed to hold a secondary reserve fund equal to 2 percent of all the mortgages on its books. An independent actuarial study released in November showed the reserve had fallen to 0.53 percent.

Raising the minimum down payment to 5 percent from 3.5 percent would be one way to reduce the risk of foreclosures, said Rep. Scott Garrett, R-N.J., who has introduced legislation mandating such a change.

In 2008, Congress raised the minimum down payment to 3.5 percent from 3 percent, but there appears to be little support from Democratic leaders for another increase.

Donovan said that increased down payments lessen the risk of foreclosure, but other factors also lead to defaults, such as a borrower's credit score.

Donovan wouldn't commit to raising minimum down payments for all FHA loans, but said they could be raised for people who don't have high credit scores.

The FHA wants to increase the cash required from borrowers so they "have more 'skin in the game' and a stronger equity position in their loans," Donovan said.

But the agency is looking at other ways to do that as well, such as increasing the upfront mortgage premium required and preventing the premium from being financed as part of the loan.

Donovan can change credit-score requirements without congressional approval, but would need a vote by lawmakers to increase the mortgage insurance premium.

"There is a huge societal question here, which is: Why are we encouraging homeownership via the FHA if so many of those loans are destined to failure?" said Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles.

"After all, what the FHA is seeking to create is not homeownership that goes bad, but rather sustainable homeownership."