Status Of Proposed Zero-Down FHA Mortgage

August 9, 2007

The plan for FHA (the Federal Housing Administration) to introduce a zero-downpayment mortgage is being questioned by the Government Accountability Office. In a report to Congress, they warn that introducing zero-down loan products at a time of stagnant or declining home prices could increase the risk of default. They believe an initial pilot zero-down program would be advisable.

“Because of the risks and uncertainties, we continue to believe a prudent way to introduce a zero-down product would be to limit its initial availability such as through a pilot program,” a GAO spokesman said. However, The Department of Housing and Urban Development (HUD) disagrees. “The FHA is well prepared to offer a zero-down program and a pilot program in unwarranted,” said Brian Montgomery, HUD’s assistant secretary.

A zero-downpayment FHA mortgage would be a positive and progressive step forward in helping more families become homeowners. The offering of this new type of FHA home financing loan would be consistent with the government’s pledge to encourage a higher rate of homeownership in the nation.

In late July, the Senate Banking Committee drafted an FHA reform bill that cuts the FHA downpayment requirement to 1.5 percent and raises FHA loan limits. We’ll be watching the development of these proposals. On July 31, the Senate Banking Committee canceled a mark-up of the Federal Housing Administration reform bill after key Republicans complained about the process and wanted more time to work on the bill.

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