Federal Housing Authority-insured loan

U.S. Representative Scott Garrett (R-NJ) recently introduced legislation that would raise the amount borrowers put down on a Federal Housing Authority-insured loan. The current requirement of three and one-half percent would be raised to five percent under Mr. Garrett's proposal. Mr. Garrett believes that taxpayers should not be exposed to FHA's risk of insolvency and that this risk can be reduced by increasing the amount of mortgage downpayments.

FHA provides mortgage insurance for persons to purchase or refinance a principal residence. The loan itself is funded by a bank, mortgage company, or savings and loan. Qualified borrowers are eligible for financing up to 97 percent of the purchase price of the residence.

Like a considerable number of his Republican brethren who claim to be free market proponents, Mr. Garrett has substituted marginalist thinking for more risky but higher rewarding outside-the-box thinking. Increasing the downpayment requirement from three and one-half percent to five percent won't reduce defaults or delinquencies. The inability to pay due to life changing circumstances like loss of employment, medical events, and divorces lie at the root of the problem. Combine that with poor financial planning or lack of substantial assets to weather the storm of a two-year recession and we are bound to see problems.

What Garrett should be proposing is a free market approach to the financing of a house. If ever there was a time for America to reevaluate our policy on homeownership, this is it. Just like farm subsidies add to the cost of feeding our families, government insurance of mortgages is adding to the risk of moral hazard and probably the cost of a mortgage. Why do we want to guarantee home ownership anyway? So that some land developer can turn dirt and trees into cash? Yes, its a noble concept but the Constitution does not guarantee home ownership. This notion needs to be sent bye-bye along with the post-classical liberal thinking of the 1930s.

If Americans consider home purchase an investment, then they should act like investors and bear the risks and costs of making that investment. For example, instead of insuring traditional loans, government should promote partnerships between buyer and finance companies. A potential owner-partner goes to his bank to obtain alternative financing. Under an alternative financing scheme, the bank owns all legal and equitable interest in the house, minus any downpayment that the owner-partner brings to the partnership. Each payment made goes to buying out the bank's original investment.

FHA would insure the partnership. At the end of 30 years, the bank has the option of keeping its accumulated equity or selling it to the owner-partner. If the owner-partner defaults on a payment, the bank gives him notice to leave and the owner-partner loses all accumulated and contributed equity. There would be no foreclosure per se. The FHA pays the bank the difference between what the owner-partner paid and the balance of the purchase price. The bank transfers legal and equitable ownership in the property to the federal government. In addition, the government collects the unpaid balance from the owner-partner through garnishment of wages or liens on other property.

The government benefits from not having to subsidize any downpayments or closing costs. If there is a default, the government takes ownership of property that it can sell or lease in order to generate revenues for taxpayers. Foreclosure filings would be eliminated and any court expenses involved in removing occupants would be greatly reduced. More importantly, government would get out of the business of a making a market for house purchases.

Paul Stillwaggon, For All Your Real Estate Needs Contact New Jersey Estates Real Estate Group E-mail: njestates@gmail.com Web: http://www.newjerseyestates.net 908-561-5492 (Paul S) 908-310-1358 (Cell)

NJ Estates Real Estate Group Weichert Realtors 908-561-5492 55 Stirling Road, Watchung, N.J. 07069

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