FHA commissioner David Stevens testified to Congress Thursday, arguing that a blanket minimum down payment increase for FHA loans would “adversely impact the housing market recovery.”
He noted in his testimony that requiring a five percent minimum down payment on FHA loans for all borrowers (up from the current 3.5%) would reduce endorsements by a staggering 40 percent.
Stevens added that down payment alone is not the only factor that determines loan performance, pointing to credit score as a major indicator as well.
He highlighted an example where loans with a loan-to-value ratio above 95 percent and a Fico score above 580 perform better than loans with a loan-to-value below 95 percent and a Fico score below 580.
“In particular, we have proposed to permit loans to borrowers with FICO scores above 580 with a minimum 3.5% downpayment and loans to borrowers with FICO scores between 500 to 579 with a minimum 10% downpayment,” he said.
“It is also worth noting that these downpayment guidelines are minimums and many borrowers do in fact have significantly lower LTVs – in the fourth quarter of FY 2009, more than 21% of endorsed loans had a LTV lower than 90%.”
In early October of last year, New Jersey Republican Scott Garrett introduced a bill requiring all FHA borrowers to come in with at least five percent down, though such a proposal seems unlikely.
Let’s look at pictures now!
The first graphic illustrates the effects of credit score and LTV on loan quality:
The second details what percent of borrowers would be shut out as a result of the FHA’s proposed Fico/min down payment changes slated for spring and summer of this year:
Due to the improved quality of recent FHA loans, only 1.5 percent of loans endorsed in FY2009 would be excluded under the proposed guidelines.