The Housing Chronicles Blog: FHA to the rescue

Sunday, March 9, 2008

FHA to the rescue

Created during the Great Depression to create a market for mortgages insured by the federal government, the Federal Housing Administration (FHA) became mostly forgotten during the last housing boom (I actually used an FHA loan to buy my first condo in 1990). Although the program only requires a 3% down payment, its underwriting guidelines are a bit stricter than those for conventional loans -- especially those of the subprime variety -- and so both lenders and mortgage brokers weren't pushing them. But now the FHA may be the government's best hope of addressing the credit crunch without creating a new bureaucracy:

Home loans insured by the FHA have become the cheapest and, in many cases, the only alternative for borrowers who can make only a small down payment. The agency is rapidly gaining market share as government-sponsored mortgage investors Fannie Mae and Freddie Mac, stung by combined losses of about $9 billion in last year's second half, back away from credit risks by adding fees and demanding higher down payments.

The FHA doesn't make loans but provides insurance, which covers the risks of default for lenders or investors who own loans. That insurance is akin to the guarantees provided by Fannie Mae and Freddie Mac.

Policy makers see the FHA as one of the handiest tools available to keep money flowing into mortgages at a time of growing anxiety about the effects of soaring defaults and falling home prices...

"The FHA's role is going to be huge," says Brian Chappelle, a mortgage consultant who was a senior FHA official in the early 1980s. Some lenders expect the FHA to account for as much as a third of new mortgages by the end of this year, Mr. Chappelle says. That would be up from a low of 1.8% of single-family mortgage originations in 2005 and 2006, according to trade publication Inside Mortgage Finance.

The agency has long been seen as a means to help lower-income borrowers but now attracts some well-heeled people, too. At Toll Brothers Inc., a builder of homes with an average price of around $650,000, executives say more of their buyers may soon be using FHA-insured loans.

The FHA is in some ways returning to its roots as a broad-based tonic for the housing market. When Congress created the FHA in 1934, many banks were failing and housing production had collapsed. Initially, the FHA could insure loans of as much as $16,000, or about triple the median home price at that time, allowing it to serve most of the market. Congress in later decades directed the FHA to concentrate more on the entry-level housing market.

Over the past four months, Fannie and Freddie have imposed fees that lenders have to pay upfront so that loans can be guaranteed by the two companies. Those fees are passed on to borrowers and typically result in slightly higher interest rates. Fannie and Freddie also have increased down-payment requirements in areas where house prices are falling. The FHA hasn't changed its terms and allows down payments as small as about 3% nationwide.

FHA loans now are slightly cheaper than conventional loans backed by Fannie and Freddie, a reverse of the normal situation. Last week, the average rate on FHA loans was 6.29%, while conventional loans were at 6.36%, according to HSH Associates, a publisher of financial data.

The FHA's broader role exposes it to more risks, stirring fears that taxpayers ultimately may have to bail out the agency. The FHA is "underpricing for the risk that they are taking on," says Thomas Lawler, a housing economist in Leesburg, Va., who formerly worked for Fannie Mae.

FHA officials counter that the FHA requires borrowers to document their ability to repay loans and has never needed a bailout for its single-family mortgage program. "The FHA is playing exactly the role it's supposed to play," maintaining the flow of mortgage credit, says Meg Burns, a senior official at the agency. "We need to be there as a backstop."...

The economic-stimulus bill passed by Congress and signed by President Bush last month raises the ceiling on the size of loans the FHA can insure to $729,750 in the highest-cost areas from a previous cap of $362,790. The new limits are due to expire at the end of this year. By then, however, Congress is likely to have enacted legislation that would permanently raise the loan limits, though perhaps by a lesser amount.

Yesterday, the Department of Housing and Urban Development, which runs the FHA, announced the new temporary loan ceilings in California. Details for the rest of the country are due to be announced this week, perhaps today. The California loan caps range from $271,050 in lower-cost areas such as Lassen and Trinity counties to $729,750 in high-cost counties in the Los Angeles and San Francisco areas.

Those upper limits also will apply to loans purchased or guaranteed by Fannie and Freddie, HUD officials said. Even in low-cost areas, Fannie and Freddie can handle loans of as much as $417,000...

The FHA could raise its insurance prices. For now, all borrowers with FHA-insured loans must pay an up-front fee for that insurance equaling 1.5% of the loan amount. Then they need to pay additional fees of 0.5% per year based on the outstanding loan balance. (If borrowers make payments for five years and the loan balance falls to 78% of the original value of the property, the annual fee is no longer due.)

The FHA also allows sellers to provide more sweeteners to buyers, such as by paying loan-closing costs, which can be crucial in a weak market. Such concessions on FHA-backed loans can be as much as 6% of the home's sale price; for low-down-payment loans backed by Fannie or Freddie, the maximum allowed for seller concessions is 3%

FHA Mortgage Limits in California by County

County Name Median Home Price FHA Limit
Alameda County $995,000 $729,750
Alpine County 438,000 547,500
Amador County 355,000 443,750
Butte County 320,000 400,000
Calaveras County 370,000 462,500
Colusa County 318,000 397,500
Contra Costa County 995,000 729,750
Del Norte County 249,000 311,250
El Dorado County 464,000 580,000
Fresno County 305,000 381,250
Glenn County 230,000 287,500
Humboldt County 315,000 393,750
Imperial County 260,000 325,000
Inyo County 350,000 437,500
Kern County 295,000 368,750
Kings County 260,000 325,000
Lake County 321,000 401,250
Lassen County 200,000 271,050
Los Angeles County 710,000 729,750
Madera County 340,000 425,000
Marin County 995,000 729,750
Mariposa County 330,000 412,500
Mendocino County 410,000 512,500
Merced County 378,000 472,500
Modoc County 125,000 271,050
Mono County 370,000 462,500
Monterey County 599,000 729,750
Napa County 615,000 729,750
Nevada County 450,000 562,500
Orange County 710,000 729,750
Placer County 464,000 580,000
Plumas County 328,000 410,000
Riverside County 400,000 500,000
Sacramento County 464,000 580,000
San Benito County 790,000 729,750
San Bernardino County 400,000 500,000
San Diego County 558,000 697,500
San Francisco County 995,000 729,750
San Joaquin County 391,000 488,750
San Luis Obispo County 550,000 687,500
San Mateo County 995,000 729,750
Santa Barbara County 615,000 729,750
Santa Clara County 790,000 72,9750
Santa Cruz County 719,000 729,750
Shasta County 339,000 423,750
Sierra County 228,000 285,000
Siskiyou County 235,000 293,750
Solano County 446,000 557,500
Sonoma County 530,000 662,500
Stanislaus County 339,000 423,750
Sutter County 340,000 425,000
Tehama County 250,000 312,500
Trinity County 200,000 271,050
Tulare County 260,000 325,000
Tuolumne County 350,000 437,500
Ventura County 599,000 729,750
Yolo County 464,000 580,000
Yuba County 340,000 425,000

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