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Bill Would Raise FHA Downpayments

Rep. Garrett calling for 5% minimum downpayments

Oct. 1, 2009

By staff

A New Jersey congressman is introducing legislation that would increase cash down payments required on loans insured by the Federal Housing Administration.

Rep. Scott Garrett (R-N.J.) announced today the introduction of the FHA Taxpayer Protection Act of 2009.

Garrett noted that the Housing and Economic Recovery Act, which became law in July 2008, allowed closing costs to be financed on FHA loans -- effectively lowering required cash down to as low as 2.5 percent.

Garrett's bill proposes raising downpayments to 5 percent. In addition, it would eliminate the financing of closing costs.

The proposed law would also require a Government Accountability Office study of FHA fiscal soundness.

"The benefits of promoting homeownership using government subsidies must be balanced against the potential risk of insuring less creditworthy borrowers and exposing the American taxpayer to that risk," Garret explained in the statement. "As we have learned repeatedly throughout the mortgage crisis, the amount of equity a homeowner has in their home directly correlates to the credit risk associated to their mortgage."

The representative cited Congressional testimony today from Federal Reserve Board Chairman Ben Bernanke that reportedly indicated a greater risk of taxpayer losses accompany low downpayments. He also pointed to the growing FHA market share -- from 3 percent in 2006 to more than 20 percent this year -- and to the potential that FHA will fall below its congressionally mandated 2 percent capital ratio.

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