Wednesday, March 21, 2007

What about FHA?

A hearing on Capitol Hill last Thursday focused attention on one of the key solutions for home buyers and refinancers squeezed out of the subprime market: FHA's insured loan programs, which typically offer lower interest rates, low downpayments, generous underwriting and superior consumer protections compared with subprime.

The hearing was on legislative efforts now underway to raise FHA's mortgage maximums to the same levels as Fannie Mae's and Freddie Mac's in high cost areas-currently $417,000-and to give the agency new powers to compete more effectively with private subprime lenders.
FHA offers a lot to credit-impaired consumers that they can't find in the private marketplace-the agency never charges prepayment penalties, as just one example-yet it has gradually lost its once dominant position and slipped to a 3 to 4 percent share of the total market in recent years. Meanwhile, subprime lenders-fueled with Wall Street mortgage bond money and hefty fees-have grown steadily to control anywhere from 15 to 20 percent of the total market, according to industry estimates.

Subprime lenders boomed from 2000 to 2006 by offering loan concepts FHA could not-or would not-touch: nothing down, no income or asset verification, payment option, balloon payment, piggyback first and second liens, interest only and "2/28" adjustables.
Now growing numbers of people who bought houses using these subprime techniques are facing payment resets, and zero or negative equity positions. Their high delinquency rates have triggered the meltdown in the subprime space, with dozens of companies leaving the business, and sharply restricting new loans.

FHA, which offers 3 percent downpayments and rates averaging 3 percentage points below subprime competitors, developed the reputation of being slow, bureaucratic and overly protective of consumers during the same time subprime companies were expanding their operations. Worse yet, in high cost areas such as California, FHA's $363,000 loan ceiling was too low to handle even first-time buyers.

But now the situation has changed radically: Subprime wholesalers are on the ropes, ratcheting up underwriting standards, scaling back loan programs or simply going out of business. Their home buyer customers need a resource to turn to, and many subprime home owners need a place to refinance.

The good news, industry officials say, is that in the past two years, FHA has rid itself of many of the bureaucratic hang-ups that one plagued it, and loosened up its overly protective requirements on appraisals and mandatory fixups of properties prior to sale. Perhaps more important, they add: FHA is not subject to financing cutbacks from Wall Street that are now slamming doors on subprime borrowers. Its bonds are all backed by the federal government, so unlike the collapsing subprime capital arena, there's plenty of money for FHA-insured home buyers and refinancers.


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