FHA Math: 5 percent = Disaster

FHA Chief David Stevens didn’t exactly inspire confidence last week when he rebuffed repeated calls to boost the housing program’s minimum down payment.

In fact, he might have injected a new degree of concern into the already murky debate over how to reform the increasingly crucial home lending program.

As has been covered extensively here at BiggerPockets and elsewhere, the FHA plans to tighten lending standards. Chief among those changes is an increase to the minimum down payment for borrowers with lower credit scores.

Congressional Republicans and some industry observers have urged the FHA to boost the down payment requirement across the board, to 5 percent from its standard 3.5 percent minimum.

But that proposed increase could trigger devastating consequences for the nation’s fledgling recovery, Stevens told a House hearing last week.

“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,” Stevens told the committee. “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.”

Stevens is predicting a “double dip” in housing prices as the pool of prospective homebuyers would shrink.

Those are some pretty stunning statements, considering we’re talking about a prospective down payment hike of 1.5 percentage points. What exactly does that say about the course of recovery?

It’s difficult to imagine the U.S. economy could sustain that type of blow. At the same time, projections and estimates like that only embolden critics who worry the FHA is the next subprime crisis in waiting.

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