Why former Ginnie Mae chief is reviving the FHA 0% down idea

Presidential candidate Kamala Harris' interest in offering $25,000 grants to address homebuyer affordability challenges has spurred various counter proposals. Among the most interesting is a zero-down Federal Housing Administration loan concept's revival.

Given the idea was first floated as a legislative proposal prior to a housing crash that demonstrated the importance of equity, the idea of an FHA-insured loan with none seems questionable, but an expert who once oversaw securitized government loan guarantor Ginnie Mae says numbers he has run support it.

Administration-insured loans with DPA grants, which essentially let borrowers off the hook for a downpayment, had a serious delinquency rate by 1.3 percentage points higher than the current existing limit for the loan-to-value ratio, according to September numbers Tozer examined.

"The risk is marginal," said Ted Tozer, the former president of Ginnie Mae and one of the authors of a recent Urban Institute blog on the topic. "For marginal risk, why are we creating this huge barrier?"

Cost-wise, Tozer and his co-authors who also have held federal posts, Michael Stegman and Richard Green, put the average loss for a 0% down FHA portfolio at around 0.44% of its original principal value or less than $1,500 per loan, and note it's a far lower expenditure than grants or down payment assistance.

"If you had to pick the most efficient way to solve the math problem with the least amount of taxpayer risk, I would argue you're better off to not have a downpayment requirement, and even if there's a slight increase in defaults," said David Battany, executive vice president of capital markets at Guild Mortgage.

"Critics would say that if there's less skin in the game, the borrower would have a higher probability of walking away," he added. "What I would argue to that criticism is that if you're a 3.5% down borrower and real estate commissions are above that, you're already at a negative or zero equity position anyway."

Also, underwriting standards also have gotten much tighter than they were when mortgage performance suffered due to high loan-to-value ratios in the Great Financial Crisis, he noted.

Some other housing policy experts also said there could be some resistance to the idea given the historical performance risk stemming from the lack of a down payment, but that it could be viable with safeguards.

"Many people will jump to say this is just like the runup to the mortgage crisis and we haven't learned anything. I don't think that's true. I think we've learned a lot, and the question is, are we going to put those lessons into action?" David Dworkin, president and CEO of the National Housing Conference.

"There are several things that are essential to making a zero down payment mortgage, because there is no question that a higher down payment results in higher performance and lower losses," he added.

Limits Dworkin suggested include maintaining other strong FHA underwriting standards, coupling the program with counseling requirements similar to some down payment assistance providers already have, and measures to ensure borrowers have reserves.

"It's essential that we have appropriate controls to ensure that people are not set up for failure and their American dream becomes a nightmare," he said.

The 0% down concept also could lead to resistance from down payment assistance providers, but Tozer said his intention would not be to cut current purveyors of it out of the market, but to encourage them to shift their support more toward closing costs. He also suggests limits and guardrails for 0% down loans. 

The Department of Housing and Urban Development showed some appreciation for the concept's revival but indicated lawmakers would have to take it up for it to get anywhere. The original version of the concept was backed by a 2004 House measure, a Congressional Budget Office report and a fiscal year 2005 HUD budget proposal, according to the Urban Institute blog.

"We appreciate all dialogue and proposals on the ways our Federal Housing Administration can enhance its programs to expand access to mortgage credit for the nation's homebuyers," a HUD spokesperson said. "Not withstanding that general interest, the addition of this type of product would require congressional action."

Dworkin — who has held financial or housing posts in federal government for both Republican and Democratic administrations — suggested the idea does have value in its potential bipartisan appeal, and could work if it started on a test basis and continued to exist alongside existing DPA options.

"I think that it makes a lot of sense as a pilot," he said. "If we're going to be successful, we need to take a variety of approaches, and so supporting existing downpayment assistance programs that have a track record of success should always be a part of the strategy."