Mark Wisterman's Paradise & Lake Oroville Real Estate Blog

Bet that got your attention, huh? While, for now this is a simply an attention getting headline, the reality is that there is a chance this could actually happen.

A recent audit of the FHA loan progran recently revealed that the agency has fallen significantly short in the amount of loan reserves that it is required, by law, to have.  These loan reserves are used to pay claims from lenders when an FHA loans are foreclosed upon.

I don’t want to get overly technical about this but the law requires FHA to have an amount equal to 2% of the outstanding loans that they insure in a reserve account to pay for claims. The current reserves that the FHA has on hand is .53% . Barely a quarter of what is required.

With FHA financing being almost the only way to get a home loan these days, pressure has been mounting on the agency’s reserves.

There are a number of scenarios that, if accurate, could bring these reserves back into line. An article in a recent issue of the Washington Post goes into more details on these scenarios.

The potential impact of this on both buyers and sellers in the Lake Oroville real estate market could be dramatic. Among the solutions to the problem would be to raise the premium the FHA charges for mortgage insurance. This would help build the reserves but, at the same time, increase one’s house payment.

Another would be to raise the amount of money required as a down paymentfor the loan.  Currently an FHA loan requires a down payment of 3.5% of the purchase price, increased recently from 3%. On a $200,000 home a buyer of an Oroville home now needs to have a downpayment of $7,000. If the requirement is raised to 5% that same home will require a down payment of $10,000. A  42% increase! 

There is no doubt, should either or both of these scenarios be put in place, that it will slow the sales of homes. The end result should be that buyer’s will have to work and save a little bit more than they are now before buying a home. This, in my view is a good thing.  

The bottom line here is that the FHA is currently the lifeline to this housing market and it is vital that it stay solvent.

I don’t know about you, but I would much rather increase these requirements, even though it may temporarily sqeeze some buyer’s out of the market, than to have the whole prgram collapes under its own weight.

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