Virtues of 100% FHA

While the nation currently has one of the highest rates of homeownership — with 69.1% of households owning their own home — the same rate masks a glaring disparity: minorities have a much lower rate of homeownership than nonminorities, and low- and moderate-income families have a much lower rate of homeownership than those at or above median-income levels, Mike Petrie, chairman of the Mortgage Bankers Association, stated in prepared testimony to Congress.

The testimony was delivered Thursday before the House Financial Services Subcommittee on Housing and Community Opportunity during the “H. R. 3043, The Zero Downpayment Pilot Program Act of 2005” hearing.

In addition to the homeownership gap, Petrie noted that the growth of certain mortgage products has recently prompted concerns that lenders are extending too much credit, that many borrowers are put into products not suitable for them and that such loans may pose a risk to the industry.

“These are good reasons as to why this country needs a strong FHA, an FHA that is empowered to pilot products and specifically why we need H. R. 3043,” Petrie said.

The act would allow the Federal Housing Administration to insure no downpayment mortgage financing for consumers. Because a downpayment is considered one of the major obstacles in obtaining financing for a home and such a hurdle disproportionately affects low-and-moderate income families, the MBA believes such a program is the appropriate tool for addressing the downpayment challenge and thus expand homeownership opportunities.

Although other zero downpayment programs exist in the market, the FHAs program differs because of the protections of its loss mitigation program, which offers borrowers various options if they have problems after the closing of their loan, the chairman said. Plus, it would require that prospects receive counseling by a HUD-approved counseling agency during the origination process and requires that loans be screened by FHAs Technology Open To Approved Lenders mortgage scorecard, which analyzes credit score among other factors in assessing a potential borrower.

Petrie cited a March report by HUD that found downpayment programs where the seller provides the downpayment indirectly to the borrower had high default rates. The report showed that the borrowers utilizing these seller-provided downpayment assistance programs, which lack the risk mitigation features of the proposed FHA program, share the same risk profile as those that would be served by FHAs zero down.

The MBA chairman said most of the zero downpayment borrowers would be the same type of borrowers that FHA insured under loans with downpayment assistance from nonprofit organizations, but that appropriate risk mitigation tools in the proposed program would result in a lower default rate.

Petrie noted that FHAs single-family programs serve minorities at higher rates than the market at large — nearly a third of all FHA borrowers in 2003 were minorities, twice the rate of the conventional market. Also, 58% of FHA borrowers had low to moderate income. In analyzing purchase loans, FHA served as many African-American and Hispanic families in 2003 as Fannie Mae and Freddie Mac combined and about 80% were first-time borrowers.

“There’s nothing more productive that this Congress could do this year in helping focus mortgage product innovation on meeting the needs of consumers, than by passing H. R. 3043,” Petrie said.