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FHA Past, Present and Future


Sunday, December 6th, 2009


Prior to the Great Depression homes were typically financed with large down payments and loans were for a maximum of five years. All that changed with the onset of the Depression and the housing crisis that came with it. The passage of the National Housing Act of 1934 provided the foundation for the Federal Housing Administration or FHA. The FHA was to be a federally backed insurance system so that lenders would be encouraged to make loans at more attractive terms than previously available. The idea was that insurance premiums collected from borrowers would provide a pool of funds that would cover loan losses.

FHA’s mission was to encourage growth in the housing market and during difficult times help sustain it. Over time the FHA has been a valuable source of financing such as during the post WWII period especially for veterans then into the 1970’s when rates were very high. In the 1980’s when banks limited their lending due to the recession FHA was there. During the 1990’s and into the early part of the new century FHA was there but its share of the market continued to be small. The housing crisis of 2006 shed new light on FHA.

During 2005 and into 2006 it was becoming increasingly apparent that the “sub-prime” and “Alt A” loan products were going to be in for a tough ride. These products generally offered home buyers no money down financing  and had very liberal qualifying standards including in some cases little or no documentation of income or assets. As these products disappeared FHA stepped in and filled the void. With its 3% down payment (now 3.5%) and flexible underwriting standards it started picking up the slack as lenders fell by the wayside. Where FHA share of the mortgage market had been historically less than 5% it has grown recently and now approaches 30%.

Today FHA loans are available through a network of FHA approved lenders who are responsible for making sure borrowers meet the minimum qualifying standards. These standards include credit scores as low as 620, debt ratios as high as 55% (with compensating factors) and flexibility with recent credit history issues. Because of the increasing volume there is growing concern over FHA’s financial viability. While FHA gets its revenue from mortgage insurance premiums it still has a strong connection to the government. Recently it was revealed that FHA’s reserve was only .53% yet the minimum set by Congress is 2%. In addition second quarter 2009 delinquency (most recent data available) stands at a disconcerting 14.42%. FHA leadership does not believe that they will have to ask Congress for assistance but it is estimated by the end of 2010 FHA’s portfolio will hit the ONE TRILLION dollar level. The agency’s new chief credit quality executive has expressed his concerns that FHA’s share of the mortgage market is much too high.

There are a number of measures and changes being discussed to insure that FHA will continue to meet its mission into the future. Among the proposed changes are increasing the down payment to 5% or more; increasing mortgage insurance premiums (currently 1.75% of the loan amount up front and .55% of the loan amount per month ; limit the amount of costs that sellers can pay toward closing costs (current maximum is 6% a proposed new limit is 2%); Raise the FHA minimum credit score (some lenders have already done this on their own); implement risk based pricing model; tighten overall credit standards by reducing current flexibility and requiring minimum buyer cash reserves to name a few. While all of this would likely improve the performance of FHA’s portfolio over time it would also shrink the number of qualified borrowers. Clearly FHA has a difficult balancing act on its hands as it struggles to figure out the best combination of factors to fulfill its mission.

Since its inception FHA has insured 34 million mortgages and 47,000 multi-family properties. Today it has 4.8 million mortgages on its books as well as 13,000 multi-family properties.



The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com



Tags: federal housing administration , fha , mortgage insurance premiums , national housing act