Budget Dismisses Default Worries on Zero-Down FHA Loans
The Bush administration is sticking to its guns and once again it will push for a federally insured zero-downpayment program, despite resistance in Congress and concerns about high default rates and claims.
The president's budget proposal for fiscal year 2006 calls on Congress to approve a Federal Housing Administration zero-down program that would allow first-time homebuyers with strong credit records to finance 100% of the home purchase and closing costs.
The administration also is asking Congress to take a second look at a FHA "payment incentive" program that would allow subprime borrowers (who have improved their credit scores) to refinance into a cheaper FHA-insured loan.
These FHA mortgage programs would "remove two large barriers to homeownership - downpayment and impaired credit," according to the FY 2006 budget proposal the president sent to Congress last month.
Legislation to create the FHA zero-down program was approved by a House committee last year. But the bill was stopped in its tracks when the Congressional Budget Office estimated the new program would incur $125 million in losses annually.
The president's budget estimates the zero-down program would generate $231 million in revenue annually and help over 200,000 families purchase their first home.
In a recent speech, Department of Housing and Urban Development secretary Alfonso Jackson suggested the FHA could design a zero-down program with a low default rate.
"If we can make this work, you will see very little defaults," the HUD secretary said.
The payment incentives loan program would require a subprime borrower to have 10% equity in the home after refinancing into a FHA loan and pay a higher insurance premium initially. If the borrower makes the monthly mortgage payments on time, the annual premium would be reduced to the standard 50 basis points.
The FHA called it a "subprime program" last year and it did not get any traction in Congress. FHA commissioner John Weicher told reporters last week that subprime borrowers would benefit from getting a FHA loan. "We could serve them at the higher premium and cover our costs."
The Bush administration estimates the FHA payment incentive program would help almost 60,000 homebuyers and generate $37 million a year in annual revenue.
At the same time the Office of Management and Budget is projecting positive cash flows for the zero-down program, it criticized FHA's estimates for loan losses.
The FHA's "credit model does not accurately predict losses to the insurance fund," OMB says in a budget document.
In each budget request, OMB annually predicts FHA claims on loan defaults and foreclosures will decline, but they don't.
In the fiscal year 2005 budget proposal, OMB predicted claims would decline to $4.5 billion. Now OMB estimates the claims will total $5.9 billion when the FY 2005 ends Sept. 30. For FY 2006, OMB projects that FHA claims will decline to $5.4 billion.
"FHA will continue current efforts to develop a credit model that more accurately and reliably predicts defaults," a budget document says. OMB also wants the FHA to establish annual percentage goals for serving first-time and minority homeowners.
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