Home buyers will have to lay out more cash for an FHA mortgage


Reporting from Los Angeles and Washington Alejandro Lazo -- Thousands of Southern California home buyers, and millions nationwide, will have to come up with more cash and reach higher minimum credit scores to get a government-backed mortgage under changes unveiled by the Federal Housing Administration.

Some loans might require more than the current 3.5% minimum down payment, but the Obama administration is resisting calls for an across-the-board hike. 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 up front.

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% in 2006 to nearly 30% 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.

In Southern California, FHA-backed loans have become a crucial source of financing for first-time home buyers, particularly those snapping up foreclosed homes. FHA loans made up 38.3% of all Southland purchase loans in October, up from 32.5% a year earlier and just 2% two years before, according to MDA DataQuick, a San Diego real estate research firm.

George Ramirez, a sales manager for Citibank, and his wife, Leticia, a social worker, got an FHA-insured loan in August 2008 to buy a three-bedroom home with a swimming pool in La Puente. Without such a loan, he said, “there is no way” they could have bought it. The FHA let them put $8,250 down for the $275,000 house, or 3%, the minimum then.

“These loans are actually going to help people who are looking for the American dream,” Ramirez said, “and if they start restructuring, it’s going to hurt them.”

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% 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.

Vincent Flores, a real estate agent in Lakewood, said the FHA has been the main lending source for many of the first-time home buyers he works with, and a higher minimum down payment could keep them out of the market.

On a $300,000 house, a 3.5% down payment would amount to $10,500. If the down-payment requirement grows to 5%, as some have called for, a buyer would have to put down $15,000. “That’s $4,500 more, and that’s quite a bit to save,” Flores said.

Donovan told the House Financial Services Committee that the expanded role of the FHA is temporary only until the mortgage financing market recovers, and that 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% of all the mortgages on its books. An independent actuarial study released last month showed the reserve had fallen to 0.53%.

Raising the minimum down payment to 5% from 3.5% 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% from 3%, but it appears Democratic leaders would not support 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. The upfront premium now is 1.75% of the loan’s amount and the annual premium is 0.5% to 0.55%, depending on the size of the down payment. On a $300,000 loan, the upfront premium would be $5,250 and the annual premium would be $1,500 to $1,650.

“There is a huge societal question here, which is: Why are we encouraging home ownership via the FHA if so many of those loans are destined to failure?” said Stuart A. Gabriel, director of the Ziman Center for Real Estate at UCLA. “After all, what the FHA is seeking to create is not homeownership that goes bad, but rather sustainable homeownership.”

Ryan Nowicki, a Hermosa Beach tax attorney, is looking to be one of those long-time homeowners, but said that without an FHA-backed loan, he and his wife wouldn’t be poised to close next week on a town house in Redondo Beach.

Dave Emerson, a Realtor in the Lakewood area, said the FHA needs to make some changes to reduce its risk.

“The question is, are we far enough along on this recovery that the market can handle that?” he said. “I think the argument could be made that there is enough competition for homes that tightening the requirements a little bit makes sense. . . . The question is how they do it.”