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Small Cut in LTV Could Have Big Impact on FHA

FHA commissioner testifies

March 11, 2010

By MortgageDaily.com staff


The head of the Federal Housing Administration warns that lowering the loan-to-value on FHA loans -- even just a little -- would wipe out 40 percent of FHA originations.

FHA Commissioner David H. Stevens gave that assessment today in testimony before the House Financial Services Subcommittee on Housing and Community Opportunity.

The commissioner highlighted suggestions by some to raise the minimum downpayment on all FHA loans to 5 percent.

He said FHA analyzed a large sample of previously endorsed files to identify how many borrowers had the additional 1.5 percent available at the time they closed their loans.

"Such a policy change would reduce the volume of loans endorsed by FHA by more than 40 percent, while only contributing $500 million in additional budget receipts," Stephens testified. "This translates to more than 300,000 fewer first-time homebuyers and would have significant negative impacts on the broader housing market -- potentially forestalling the recovery of the housing market and potentially leading to a double-dip in housing prices by significantly curtailing demand."

He said that downpayments should be increased to 10 percent just for borrowers with FICO scores between 500 and 579.

Testimony today by Mortgage Bankers Association President and Chief Executive Officer John A. Courson indicated that his group supported higher FHA downpayments, but only for borrowers with credit scores below 580.

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