Why FHA Down Payment Requirements Should Not Be Increased to 5%

Politicians just love to introduce new regulations, don’t they?

Every time something goes wrong, these lawmakers love to throw their weight around trying to show their constituents that they have their best interests in mind. They think they know what they are doing but history shows us otherwise.

So this republican representative, Rep. Scott Garretts from New Jersey thinks the FHA needs to make it more difficult for prospective borrowers to be approved for FHA loans. His reasoning is that currently, the FHA has a very high default rate and by making their lending guidelines more stringent, it would better protect the American taxpayer from having to bail it out in the future.

Here’s the problem. With every new regulation, with every new tightening up of lending standards, it takes more buyers out of the housing market. And what the market needs most right now (and in the future for that matter), is more buyers!

The politicians of this country don’t seem to be able to comprehend this. Yes, things did get out of hand. Mortgages were granted to people that should not have gotten them, we know that. But what these politicians don’t seem to realize is that the housing bubble burst mainly because of falling values… not lending standards. Now, it’s true that the lax lending standards brought values up to an unsustainable level. Values had to fall. But what should have been a “correction” turned into a free fall because barely anyone could get approved for a mortgage!

Look… lenders did the exact opposite of what they should have done. When values in this country started hitting the stratosphere, that is when they should have been reigning in their lending standards. But the greedy bankers along with their greedy brethren on Wall Street just couldn’t let go of the kings meal. They were frothing at the mouth for more loans when in fact, they should have been exhibiting prudence. Think of it… when would you want to extend a collateral loan loan to someone… after it has doubled in value or after its value has been cut in half?

So now, what the housing market in this country really needs – more aggressive lending standards – is just a pipe dream. Prices cannot stabilize because there are not enough buyers in the market. Well, let me correct that. There are plenty of buyers. They just can’t get loans! So that makes them a non-entity. They’re not buyers if they can’t get a loan.

The FHA offered loans at even less than 3.5% down for many, many years. It was an agency that was self funded – no taxpayers dollars were ever used to fund or bailout the FHA. We had a stable market and it would have stayed that way if our government would have been on the ball even a little bit. Smart people in this country saw it coming. Some made billions off what they recognized as an unsustainable situation. We needed regulation before the crash. The regulations we are getting now will only hold the real estate market down for years to come.

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About the Author

Ron Borg is the founder of Mortgage123.com , a mortgage shopping portal. He also maintains AskRonBorg.com for prospective borrowers that have mortgage related questions.