Looking to reform the FHA and open up more federal money for loan guarantees, Senate leaders are discussing the options this week. The goal according to reports from The Hill, an insiders website and magazine, is to lower the required down payment by borrowers to qualify for the FHA guarantee.

While this is a great populist notion, underwriting loans by the Federal Government where the borrower has a minimal or no stake in the proceedings is a recipe for disaster down the road. We are all worried about the subprime meltdown for good reason, but could you imagine how much worse it would be if the Federal government underwrote the bad loans? And how many more loans would have been written.

Accountability is a large part of a successful capitalistic economy. If you make a bad decision, it will cost you. I can speak from experience that I have made bad decisions and it has cost me. However, if you knew that you could take a flyer on buying a home and the worst case was that the government would bail you out, the risk would be out of the equation. Once you take the risk out, then people would just do it and the tax payers would be carrying the burden.

And while some would love to expand the size and scope of the government, I am not one of them.

Dodd said he was working with Shelby as well as Martinez, Schumer, Sen. Jack Reed (D-R.I.) and others to “find common ground” on the issue. “A reinvigorated FHA can help offer American homebuyers a much safer and more stable alternative,” Dodd said.

A sticking point is the no-money-down provision. Currently, the FHA insures loans only when the borrower makes a 3 percent down payment. Lobbyists expect a Dodd-Martinez bill to relax the requirement to 1.5 percent “cash down,” in the form of a down payment, closing costs or other expenses. But that might not be enough to appease Shelby, who has voiced skepticism about expanding the FHA, lobbyists said.

“One lesson learned from the current pattern of defaults and delinquencies in the sub-prime market is that those borrowers with little or no equity in their home will be the most likely to fail,” Shelby said at a Banking Committee hearing on FHA reform last month.  via TheHill.com

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