I first caught whiff of this in an Inman News article by Matt Carter. Then I saw an editorial about it in The Washington Post. Then I heard a short piece on Marketplace Money from American Public Media on my local NPR station (you know how us liberals love our NPR). So I know I wasn’t hallucinating.
It seems that the FHA is going have stricter guidelines, to wit:
- raising the minimum down payment from 3.5% to 5%
- raising the minimum FICO credit score to 620
- raising both the upfront and ongoing mortgage insurance premiums
- reduce maximum Seller contribution allowable from 6% to 3%
All this and more in the name of shoring up FHA reserves which are astonishingly low. It seems that what used to be the lending program of last resort is taking a bath on continuing mortgage defaults. Considering that the concept behind FHA is to provide financing for moderate income borrowers chasing the American Dream of of home ownership, it’s surprising that Congress won’t step up to the plate to bailout the FHA.
On the one hand, we have the Government providing these really nice tax credits to encourage home ownership. We have the Federal Reserve keeping mortgage interest rates low by massive buying of mortgage backed securities. We have everyone talking about the need for the housing industry to help lead the country out of the recession. After all, when people buy homes, jobs are created or saved and a huge litany of businesses flourish to support it. After all we are constantly being told that we need to spend, spend, spend in order to help the recovery.
The United States has moved from being an agricultural economy through the industrial/manufacturing economy into the service/information economy we now live in. We don’t make much of anything anymore. We do build houses and, as the saying goes, people gotta live somewhere. Yet, credit to buy houses remains exceedingly restrictive and, with this announcement from the FHA about it’s new guidelines, it is about to get a whole lot tighter. What’s a spender to do? Get another 60″ flat screen?
To be honest, I know that a lot of the reason we’re in the mess now is that a lot of people bought a lot of houses with little or no money and no hopes of ever being able to keep up the monthly mortgage payment. I get that. The sub-prime lending business that is now nearly extinct loaned money to anyone who could fog a mirror.
However, there are also a lot of good people out there with decent jobs that could probably afford the monthly nut, if they could just get the key to the front door. We have turned so completely into a consumer economy that until the most recent economic meltdown we had a National savings rate in negative territory. Now, both private lenders and the Federal Government are telling potential home buyers that they better have a pretty big wad of cash or it ain’t gonna happen for them.
I would love for everyone of my buyer clients to be “A paper” with a ton of money in the bank. Gosh, wouldn’t negotiating a contract be a lot easier if my buyer client didn’t need closing help from the seller? Wouldn’t it be wonderful if everyone had 20% for a down payment? 10%? I’m into it. If we could go back to the good ol’ days when people either saved and paid cash — all cash — for a house or had 20%+ to put down, it’d be great. And home prices would be in the low double digits.
So, for now, it looks like the buyer pool is going to shrink again. Of course, that means home prices are going to have to come down some more. Maybe a lot more. That means a lot more home owners who might have otherwise sold their homes with their head held high and credit intact are going to be underwater.
But, hey, if this was easy, anyone could do it.