No-Down-Payment
FHA Loan Proposed For
1st-Time Buyers
By
Jody Shenn
21 January 2004
American Banker
WASHINGTON
-- In the latest of
a recent string of Bush
administration moves
to boost homeownership,
the Federal Housing
Administration proposed
to make no-down-payment
loans available to its
first-time homebuyers.
John
C. Weicher, the FHA's
commissioner, announced
the proposal Monday
at the National Association
of Home Builders' annual
convention in Las Vegas.
The
move followed several
similar administration
initiatives. Last month
President Bush signed
the American Dream Downpayment
Act, which offers $200
million a year in annual
down-payment assistance.
Also last month, HUD
sent to the Office of
Budget Management a
proposed reform of the
Real Estate Settlement
Procedures Act that
it says could cut an
average of $700 from
closing costs.
The
Department of Housing
and Urban Development,
which includes the FHA,
predicted that the newly
proposed no-down-payment
program, part of its
proposed fiscal-2005
budget, would generate
150,000 homebuyers in
its first year alone.
The
lowest down payment
now on FHA loans is
3%.
The
no-down-payment borrowers
would pay an up-front
premium of 2.25% of
the loan amount to offset
the higher risk to lenders.
(All FHA borrowers now
pay 1.5%.) But unlike
current FHA borrowers,
they could finance closing
costs.
For
five years the no-down-payment
borrowers would pay
interest rates 75 basis
points higher than the
loan's base rate, a
spokesman said. After
that the rate would
revert to the FHA's
standard 50-basis- point
premium.
Up-front
costs represent the
biggest barrier to homeownership,
experts say. "Many
households can afford
to pay the monthly payments
if they can get to that
stage," said Raphael
Bostic, the director
of Casden Real Estate
Economics Forecast at
the Lusk Center for
Real Estate at the University
of Southern California
in Los Angeles.
"It
sounds like they're
doing this in a sensible
way" by "addressing
the risk issue as well
as trying to find ways
to increase access to
homeownership," Mr.
Bostic said. For potential
borrowers, though, "the
down-payment relief
will come at some higher
cost."
HUD's
fiscal year begins Oct.
1. The no-down-payment
mortgage would have
to be approved as part
of the HUD budget, and
the department might
not be able to offer
the loan by then.
Both
Fannie Mae and Freddie
Mac already buy certain
mortgages that have
low or no down payments.
They require mortgage
insurance for loans
with down payments of
less than 20%, and they
bar no-down-payment
borrowers from financing
closing costs or using
gifts to pay them.
Mortgage
insurers also cover
similar products bought
by other investors.
Douglas
G. Duncan, the Mortgage
Bankers Association's
chief economist, said
the proposal could help
the FHA, which has lost
market share, win back
lenders. "It's
certainly realistic
to think that might
happen," he said.
For-profit
and nonprofit providers
of down-payment assistance
also offer to make up
for the lack of a down
payment, often at a
premium. One such nonprofit
is Nehemiah Corp. of
America. But Nehemiah
would "enthusiastically
support" the move,
even though it could
put it and other such
entities out of business,
chief executive Scott
C. Syphax said in a
press release.
"Nehemiah
was created to help
alleviate one of the
savage inequalities
inherent to the homebuying
process, and we have
been calling for the
removal of the down-payment
regulation since our
inception," he
said.
FHA
delinquency rates have
increased in recent
years, in part because
the more financially
capable of its traditional
borrowers ended up in
products that charge
less for the credit
risks of low down payments.
In the third quarter,
a seasonally adjusted
12.13% of borrowers
with FHA-insured loans
were behind on payments,
compared with 2.93%
of borrowers with conventional
mortgages, the MBA said.
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