Could Proposed FHA Changes Negatively Impact Working Class Families?

In a recent study released by the American Enterprise Institute (AEI) foreclosure and housing data from 9,000 zip codes were examined to determine how Federal Housing Administration (FHA) policies have impacted working class families. According to those interpreting the study, the foreclosure rate, which is projected to exceed 15 percent, is the result of “irresponsible underwriting policies” that give low- and moderate income homeowners more house than they can afford. The report identified several areas that may need improvement but such changes could have a negatively impact those who rely on FHA loans.

Elimination Of Low-Down Payment Loans

It’s been argued that low-down payment loans provide credit to homeowners who have too little “skin in the game” and that borrowers need to share more the risk to discourage future default. But opponents of higher down payments argue that such ideas rely on the belief that defaults are due to homeowners’ carelessly defaulting and not by job conditions and financial troubles out of their control. Also, some experts argue that requiring 20 percent down payments would remove large swaths of potential buyers who have been largely responsible for the housing growth experienced in the past ten years.

Raising Debt-To-Income Ratio Requirements

Some borrowers with high debt-to-income ratios can qualify for an FHA loan.  Critics of this policy say that this has contributed to a higher rate of foreclosures amongst the working class because they typically carry large debt loads.  They argue that requiring lower debt loads before approving an FHA loan would eliminate much of the risk of future default.  But opponents of this type of reform argue that debt-to-income ratio requirements are reasonable and that tightening the restrictions could make owning a home out of reach for the typical low and moderate income family.

Shortening Loan Terms

Currently the standard 30-year loan term is the norm, which makes monthly mortgage payment amounts reasonable for a large percentage of Americans. However, some proponents of FHA reform wish to require shorter loan repayment terms. But opponents of this type of change fear that shorter repayment terms will make monthly payments unaffordable for many Americans and eventually make homeownership the realm of the wealthy.

Tightening Credit Standards

As the nation attempts to pull itself out of a recession, many Americans have suffered from lower credit scores because of job losses and other financial troubles.  Many of those potential homebuyers are beginning to look at finding a mortgage. But a proposal to raise the required credit score for FHA loans could leave some potential homeowners out in the cold.