The FHA wants to increase the cash required from borrowers so they "have more 'skin in the game' and a stronger equity position in their loans," Donovan said. But the agency is looking at other ways to do that as well, such as increasing the upfront mortgage premium required and preventing the premium from being financed as part of the loan.
Donovan can change credit-score requirements without congressional approval, but would need a vote by lawmakers to increase the mortgage insurance premium. The upfront premium now is 1.75% of the loan's amount and the annual premium is 0.5% to 0.55%, depending on the size of the down payment. On a $300,000 loan, the upfront premium would be $5,250 and the annual premium would be $1,500 to $1,650.
"There is a huge societal question here, which is: Why are we encouraging home ownership via the FHA if so many of those loans are destined to failure?" said Stuart A. Gabriel, director of the Ziman Center for Real Estate at UCLA. "After all, what the FHA is seeking to create is not homeownership that goes bad, but rather sustainable homeownership."
Ryan Nowicki, a Hermosa Beach tax attorney, is looking to be one of those long-time homeowners, but said that without an FHA-backed loan, he and his wife wouldn't be poised to close next week on a town house in Redondo Beach.
Dave Emerson, a Realtor in the Lakewood area, said the FHA needs to make some changes to reduce its risk.
"The question is, are we far enough along on this recovery that the market can handle that?" he said. "I think the argument could be made that there is enough competition for homes that tightening the requirements a little bit makes sense. . . . The question is how they do it."