Low cost FHA-backed housing loans likely to continue

Housing developmentLooks like low cost, low down-payment FHA-backed loans will be around for some time to come -- good news for potential home buyers, not such good news for those who argue that the more money borrowers invest upfront, the less likely they will be to walk away when threatened with foreclosure.

Right now, buyers getting home loans backed by the Federal Housing Administration can put down as little as 3.5% provided they meet certain financial guidelines.

In a prepared statement for a Congressional subcommittee, FHA Commissioner David Stevens says an increase in that amount could wreak havoc with the housing market, and "would adversely impact the housing market recovery."

According to a Washington Post report, the federal agency took a close look at what would have happened had it followed the advice of critics who have been demanding that would-be borrowers put down at least 5%.

Loan volume, concluded the FHA, would have dropped by a whopping 40% --meaning some 300,000 first-time home buyers would have been out of luck, not to mention out of a home.

Not that there haven't been some changes to FHA policy, as has been reported previously by WalletPop and others. For one thing, starting next month, the fee paid by borrowers, the Post points out, will go up from 1.75% of the loan value to 2.25%. In addition, those with credit scores below 580 may soon be required to put down as much as 10% in order to get an FHA-backed loan.

Although its low-cost loans have led to a depletion of its own capital reserves, Stevens insists this is not another subprime mortgage crisis in the making. "Unlike subprime lenders, FHA requires that borrowers demonstrate they can pay their mortgage by verifying their income and employment," reports Reuters.

When private capital started drying up, as Reuters points out, FHA's share of the mortgage market "ballooned."

In his statement to Congress, the FHA chief underlined that this is a temporary situation.

Charles Feldman is a journalist, media consultant and co-author of the book, "No Time To Think-The Menace of Media Speed and the 24-hour News Cycle." He has written about real estate related issues for several years.

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