It’s time to take another look at a housing proposal that has the potential of increasing the number of people who can buy their own homes.
At issue is the scope of the Federal Housing Administration, which insures mortgages for people with minimal down payments. By law, it can accept only mortgages of a modest size. The FHA wants to graduate to larger loans.
If Congress allows this change, more middle-income people would qualify for government-insured loans. And more older people could use the FHA’s excellent reverse-mortgage program (the Home Equity Conversion Mortgage).
This idea has gone nowhere in previous Congresses. Formerly, I was dubious, too. But Housing and Urban Development Secretary Andrew Cuomo changed my mind. Here’s the story:
When you want to buy a house with a down payment of less than 20 percent, the lender requires private mortgage insurance to guarantee against default.
Private insurers guarantee the majority of mortgages. But they normally don’t take loans with tiny down payments or deal with borrowers who present above-average risks.
That’s where the FHA steps in. It accepts down payments as low as 3 percent of the property’s first $25,000 in value, 5 percent of the next $100,000 and 10 percent of the rest (or 3 percent on a home worth $50,000 or less).
FHA insurance costs more than you’d pay in the private market. But you can borrow that cost and add it to your mortgage loan.
The FHA doesn’t take all comers. Still, it accepts a riskier class of borrower than private insurers do. More than 70 percent of FHA loans go to first-time buyers, Cuomo says. It also steps into neighborhoods where there’s still discrimination in lending.
But the program is limited by the size of loans that the FHA is allowed to make.
Currently, there are 250 different FHA loan ceilings in various parts of the country, each of them pegged to local average home values. The maximum loan runs from $86,317 to $170,362 (higher in Alaska and Hawaii, where housing is expensive). These maximums rise annually, in line with housing prices.
These loans work well enough for buyers with modest incomes, in low-cost housing areas. But you’re pretty much shut out if you’re dreaming of a house in the midprice range, especially in high-cost areas.
The FHA wants to raise its loan limit to $227,150. That’s the same maximum loan insured by Fannie Mae and Freddie Mac, which provide funds for non-FHA borrowers. (Larger loans would still be needed for Alaska and Hawaii, but the FHA hasn’t specified their size.)
This change might generate an extra 54,000 FHA mortgages a year, Cuomo estimates.
Opponents of the change say that those loans will be stolen from the private sector. Fannie Mae, for example, backs some imaginative lending programs for people with lower incomes, small down payments or non-traditional credit histories.
But Fannie and Freddie don’t have as broad a reach as the FHA, or as much money committed to riskier borrowers.
Borrowers will normally take a private-sector loan if they can get one. Such loans have lower fees and less paperwork.
So-called “subprime” lenders might feel the competition, however. They lend to borrowers whose credit histories show minor blemishes, charging them a higher interest rate.
FHA loans carry regular interest rates (currently around 7 percent, according to the Mortgage Bankers Association). So for some subprime borrowers, FHA loans might cost less despite their higher mortgage-insurance fees.
Opponents also object that it’s dangerous for the government to take on larger higher-risk loans. The default rate on FHA-backed loans is 7 percent, compared with 3 percent in the private sector.
But it’s the FHA’s mission to lend to people the private market rejects. And 93 percent of them do make their payments on time.
“The FHA has never cost the taxpayer money,” Cuomo says. All its expenses have been covered by mortgage-insurance fees.
Larger mortgages could actually improve the FHA’s finances. More money should come in from fees than is paid out to cover defaults, according to a projection by the Office of Management and Budget.
America’s homeownership rate stands at a record 66 percent, so the private market is doing fine. Larger FHA loans would get into corners the private market hasn’t reached.
