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FHA Changes May Cause More Loans to Go Underwater

Mortgage Application

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.

Mixed Message

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?

Mixed Feelings

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.

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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.

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Written By

“Loves sunrise walks on the beach, quaint B & Bs, former Barbie® boyfriend..." Ken is a sole practitioner and Realtor Extraordinaire in the beautiful MD Suburbs of DC. When he's not spouting off on Agent Genius he holds court from his home office in Glenn Dale, MD or the office for RE/MAX Advantage Realty in Fulton, MD...and always on the MD Suburbs of DC Blog



  1. Ken Brand

    December 6, 2009 at 9:38 am

    I understand that things need to be done. But, it reminds me of spending the night in an unfamiliar hotel. When I go to take a shower, there’s an unfamiliar lag in the hot water. So what do I do? I twist it one and nothing happens, so I crank it up, suddenly I’m scalding….I wrench the other way, nothing happens….I twist it further, then, it’s freezing. I yelp and cranking it back — nothing…then….. You get the picture, eventually I figure it out, but in the mean time it’s a wild swing between scald and shrinkage. Sadly.


  2. David Gibbons

    December 6, 2009 at 3:57 pm


    I understand how, on the face of it, you’d draw these conclusions based on slightly tighter lending guidelines for purchases. To understand this however, you need to look at the full FHA picture and include an analysis of what’s happened on the refinance side of the house. With refi’s through the HARP initiative the FHA is moving in the opposite direction and Fannie & Freddie’s borrowers can now refinance into today’s super-low rates up to 125%. This re-balancing of procurement vs refinance costs at the FHA merely indicates that the Treasury is learning that we need to stop the bleeding (i.e. foreclosures) before we can start the healing (i.e. renewed demand for housing.) I LOVE to see this happening; the Feds are learning from past mistakes and making sustainable improvements in government sponsored lending. It’s good long-term thinking.

    The reset also indicates a mature approach to no longer artificially propping up the housing market. Mortgage rates are so low right now that fools would rush in just like they did when appreciation was so badly out of line if money was too easy to come by. Tightening purchase loan requirements will simply help keep (some) foolish speculative demand out of the market and as we’ve learnt, that can only be a good thing.

  3. Jeff Linroth

    December 7, 2009 at 5:20 am

    Well said David Gibbons! I can think of precious little to add. One very big positive is happening right now. The savings rate is now above 5%. If we can just continue to be patient, it will not be long before folks have amassed the significant down payment they need – just like the good old days!

    Jeff L

    • Ken Montville

      December 7, 2009 at 11:17 am

      Hey, Jeff. It’s good to see you here on AG.

      Now, about the new FHA guidelines. Sure it’s great everyone is saving money but what about jobs and the economy in general. I’ve been told time and time again that the housing market will lead the country out of the recession. You know, carpenters, electricians, construction workers of all kinds, Home Depot, furniture stores, landscapers, etc. All these folks need money, too, and they, supposedly, in turn will buy a house as a part of the American Dream which, in turn, will create stable neighborhoods, involved parents in schools, etc.


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