May 27, 2011 (Chris Moore)

House Republicans in the Financial Services Committee have drafted a bill that would raise the minimum down payment requirements on mortgage loans insured with the Federal Housing Administration (FHA) from 3.5 percent to 5 percent and one industry giant is pushing back.

The bill would also decrease the maximum size of FHA-backed loans that had been raised in the most expensive areas of the country from $729,750 down to $625,500. The draft bill also calls for a reduction in maximum loan size in less expensive areas of the country, which currently is set at $417,000, down to $271,050.

The proposal has yet to be introduced in legislative form and like all the other housing reform bills that have originated from the House, it probably wouldn’t have a chance in the Democrat controlled Senate, but that hasn’t stopped the housing industry from expressing its displeasure.

In a recent press release, the National Association of Home Builders (NAHB) expressed its concerns that increasing the down payment requirement would create a substantial burden for all American home buyers, especially those who use FHA backed loans the most, young buyers and those with strong credit profiles but who lack the necessary finds to make a higher down payment.

“Research has shown that requiring a higher down payment does little to reduce risk of default but causes home buyers to use more of their reserves for the down payment,” said NAHB First Vice Chairman Barry Rutenberg. “Sound underwriting is the key to minimizing foreclosures and defaults, not higher down payments. This is demonstrated by current FHA foreclosure reports on loans made to borrowers with sound credit profiles, which have significantly improved.”

NAHB also feels that reducing loan limits would place further downward pressure on home prices and impair the ability of borrowers to use FHA-backed mortgage to purchase new homes. FHA high cost area loan limits are already scheduled to be reduced to $625,500 on October 1, 2011.

Instead, NAHB supports H.R. 1754, the Preserving Equal Access to Mortgage Finance Programs Act, a bipartisan measure sponsored by Reps. Gary Miller (R-Calif.) and Brad Sherman (D-Calif.) which would keep FHA loan limits at current levels.

Tags: GOP, draft bill, down payment requirement, loan limits, FHA, FHA-backed loans, NAHB, borrowers