House Republicans are floating a plan that would jack up the required down payment for homebuyers looking to secure a Federal Housing Administration-backed mortgage. The goal is to stabilize the finances of the popular government program, but critics say a bigger down payment could freeze hundreds of thousands of people out of the market at a fragile time.
The two sides will clash Wednesday at a hearing before a House Financial Services subcommittee, where experts and lawmakers are set to hash out a proposal for reforming federal mortgage programs.
Lawmakers have not yet introduced a bill, but a "discussion draft" being circulated calls for some significant changes -- particularly, a provision increasing the minimum down payment on an FHA-backed loan from 3.5 percent to 5 percent.
Their concern is that the FHA's reserves have gotten dangerously low following the wave of foreclosures at the height of the housing crisis. Though the FHA has claimed it's on firm financial footing, lawmakers want to make sure taxpayers aren't asked to foot the bill on any bailout -- as they were with Fannie Mae and Freddie Mac.
Zachary Cikanek, spokesman for Rep. Judy Biggert, R-Ill., said the draft plan is meant to "restore stability to the finances of the FHA and strike the right balance between taxpayers and homebuyers." Biggert heads the subcommittee holding the hearing Wednesday.
Though a bill has not been introduced, Cikanek said the proposal is under "strong consideration" in committee.
But the real estate industry does not support the move. The FHA program is meant to give prospective homebuyers who can't afford big down payments an entry into the market. In exchange for small down payments, qualified buyers pay more in monthly insurance costs -- money that is used to sustain the entire program. The FHA currently insures nearly 5 million mortgages.
The National Association of Realtors, citing Obama administration estimates from last year, said that if the required payment rose to 5 percent, more than 300,000 "creditworthy homebuyers" would be locked out.
"The National Association of Realtors is a strong supporter of the loan insurance programs administered by the Federal Housing Administration; while we support reforms to strengthen the program, changes should not be made at consumers' expense by drastically impacting the affordability and availability of mortgage capital," NAR President Ron Phipps said in a statement.
"NAR opposes any increases to FHA's down payment requirements, which only increases the number of borrowers ineligible for home ownership and does little to reduce risk of default."
Then-FHA Commissioner David Stevens testified before the same House subcommittee last year that his agency was already requiring 10 percent down payments for people with very poor credit scores. But he said an across-the-board minimum of 5 percent "would be inadequate to control risk for some of the borrowers and excessive to control risk for other responsible borrowers which would adversely impact the housing market recovery."
Stevens warned such an increase could stall the housing market recovery, "potentially leading to a double dip in housing prices."
The House at the time was considering a similar GOP proposal to increase the minimum to 5 percent. That proposal was struck down. But Republicans have a substantial majority in the chamber this year and are pushing for several changes beyond the down-payment requirement.
The draft proposal calls for giving the Department of Housing and Urban Development authority to disqualify "poor quality lenders" from participating; moving the Rural Housing Service from the Department of Agriculture to HUD; and setting up new oversight positions within FHA and the Government National Mortgage Association.
House Financial Services Committee Chairman Spencer Bachus, R-Ala., said in a statement that the proposal comes at a "pivotal moment," claiming the government's network of guarantee programs "could expose taxpayers to significant losses."