There was a good article in the San Diego Union Tribune recently on the resurgence of the FHA in the wake of the subprime mortgage meltdown. Here is an excerpt:
Lenders say the Federal Housing Administration is poised to resume its role as a major player in the U.S. mortgage market by coming to the aid of tens of thousands of distressed borrowers who could face foreclosure in the months ahead.
That’s because new lending limits approved by Congress will allow FHA-insured loans to be issued in high-cost markets such as San Diego at favorable terms, said Allen Jones, Bank of America’s government lending executive.
“From Bank of America’s perspective, we are very excited about the prospects of a renaissance for the FHA,” he said. “(The) FHA is a port in the storm for lenders, without a doubt.”
Recent, widespread loan failures have made credit so tight that many distressed borrowers are unable to refinance their loans. An estimated 1.8 million adjustable subprime mortgages are expected to reset at higher rates nationwide through 2009.
Jones said the FHA is coming to the rescue by bringing liquidity to lending institutions.
The agency was created in 1934 to provide long-term mortgages and put moderate-income Americans into homeownership. It operates entirely from its self-generated income. The loans it insures are known for their flexible underwriting guidelines.
FHA loans typically require small cash investments, and there is flexibility in calculating household income and payment ratios. After World War II, FHA programs helped finance homes for thousands of returning veterans.
Jones links the diminished role of the FHA in recent decades to the increasingly loose underwriting standards that preceded the recent mortgage market meltdown.
“As we entered the 2000s, you saw many players get into the mortgage business as properties appreciated,” he said. “(The) FHA became less relevant because these fast-and-easy loan products were available.”
Background: Once widely used, Federal Housing Administration-insured home loans have been squeezed out of costly real estate markets because of relatively low lending limits.
What’s happening: With limits now rising, some lenders predict a comeback for the FHA. In San Diego County, the FHA loan limit is rising to $697,500. Fannie Mae and Freddie Mac are raising their “conforming” loan limits to the same level. However, some lenders say FHA loans have favorable terms that will make them a better deal for consumers.
The future: If Congress doesn’t act, the new loan limits for FHA, Fannie Mae and Freddie Mac will expire at the end of the year.
