With defaults on mortgages insured by the Federal Housing Administration (FHA) continuing to mount, lawmakers and influential voices in the mortgage industry are pressing the federal agency to take steps to

mitigate risk and minimize losses. These critics say the most practical means of doing so is for the agency to raise its minimum downpayment requirement from 3.5 percent to 5 percent.

But in testimony Thursday at a House subcommittee hearing on FHA reform, Commissioner David Stevens flatly rebuffed the idea, citing statistical evidence that shows such an across-the-board increase would result in a 40 percent drop in the agency’s loan volume and “adversely impact the housing market recovery.”

FHA evaluated a sample of past endorsements to identify the number of borrowers who had sufficient assets at the time of loan application to contribute the additional 1.5 percent of equity at closing. Based on this analysis, the agency has concluded that such a policy change would have knocked 300,000 first-time buyers out of homeownership, while only contributing $500 million to the agency’s coffers.

“In contrast, the combination of policy changes proposed by FHA in the FY 2011 budget would contribute an additional $4.1 billion in additional receipts to FHA while having a much more moderate impact on the broader housing market,” Stevens said.

The policy changes already proposed by the agency do include raising minimum downpayments to 10 percent for borrowers with FICO scores below 580, but the increase would affect only those homebuyers that the agency has found are a greater default risk. Borrowers with FICO scores above 580 would still be eligible for the low 3.5 percent downpayment.

In addition, the FHA plans to bump up-front mortgage insurance premiums paid by borrowers from 1.75 percent to 2.25 percent – a change which takes effect April 5 – and reducing seller concessions from 6 percent to 3 percent beginning this summer. Stevens noted that the agency has also stepped up lender enforcement to protect its insurance fund even further, with the number of cases investigated since July 2009 more than all those investigated from 2002 to 2008 combined.

The drastic changes to FHA’s policies and the debate surrounding what more should be done were triggered when an independent audit of the agency’s finances late last year found that its secondary reserves had fallen below the congressionally mandated two percent level, to 0.53 percent of total insurance-in-force.

In testimony before the same subcommittee Thursday, Mortgage Bankers Association (MBA) CEO John Courson called the agency’s financial audit a “wake-up call,” but he sided with Stevens on the downpayment issue.

“We would caution policymakers to resist imposing an across-the-board increase to the FHA downpayment requirement, as this would have a chilling effect on the ability of FHA to meet the credit needs of the borrowers it serves,” Courson told lawmakers.