Draft bill would hike FHA loan down payments to 5%, slash loan limits...

A bill has been drafted by Republicans in the House Financial Services Committee which would raise the minimum down payment for FHA mortgages to 5 percent, reduce FHA loan limits in most markets and transfer the Agriculture Department’s rural housing program to U.S. Department of Housing and Urban Development (HUD), FHA’s parent agency.


Although the draft bill has not been introduced, it is likely to be formalized and rushed through subcommittee and committee votes and forwarded to the full House for action. It appears that the draft bill is a partial response by the House Republicans to the Obama administration’s call for reducing the size of federal government in housing.

The bill is expected to shrink the FHA loan volume in the country by lowering the maximum FHA loan limits in large numbers of local areas, which is well below the limits that are currently scheduled to apply on October 1. This will eliminate a resource for some home buyers who find it difficult to obtain a conventional mortgage.

Here’s an example of the current FHA loan ceiling, how it is scheduled to change in October, and where it would end up under the proposed draft bill. Monroe County in Florida would see maximum FHA loan limits go from $729,750 to $425,000. Under the scheduled Oct. 1 statutory decrease, the county which comprises the Florida Keys would have a $529,000 maximum. Sarasota would see a $261,250 drop under the bill, Miami-Dade a decrease of $161,250, and Orange County (Orlando) limits would decline by $128,750.

The FHA loan limit formula under the proposed draft legislation would be revised to 125 percent of the median home sale price in the local county, and the current $271,050 floor for loan limits nationwide would be eliminated.

Many industry groups are criticizing the bill’s call for a 5 percent minimum down payment on FHA loans. The National Association of Home Builders (NAHB) and the National Association of Realtors have opposed such legislation in the past, stating the lack of statistical evidence that adding 1.5 percent to the current 3.5 percent minimum would drastically affect default probabilities of new FHA homes.

It is expected that the higher down payment requirements along with the bill’s exclusion of financing closing costs, would make it difficult to purchase a home for a large number of home buyers. Analysts estimate about 40 percent of FHA borrowers to fail because they will not be able to afford the transaction.

The sponsoring members of the bill said the move to transfer the Agriculture Department’s rural housing program to HUD makes sense because it already has the housing responsibility and the expertise.

The proposed bill has a good chance of passage in the full House because it is controlled by Republicans, but it is definitely a tough sell in the Democrat controlled Senate, where the support for continuing FHA’s role in the market is much stronger, and any drastic cuts in loan limits in expensive housing markets is not likely to happen.