FHAs Market Share Increase is a Growing Cause of Concern
As a consequence of the economic meltdown, the government has picked up the slack for the private sector in many areas of the economy and this is the case with the Federal Housing Administration (FHA).
As private lenders have been forced to tighten up their balance sheets as well as their lending guidelines, the FHA has stepped in to federally insure almost a quarter of all new mortgage loans originated this year. Providing a federal backstop, naturally, means that taxpayers will be the ones ultimately left holding the bag when problems surface. The FHA does not actually serve as a funding lender but rather insures or guarantees loans against default which are funded by FHA approved lenders. The tradeoff for borrowers in obtaining an FHA insured loan, is that while they must pay a mortgage insurance premium, called upfront MIP in the amount of 1.5%, in addition to an annual fee which is prorated monthly in the amount of .5% thereafter, in exchange, borrowers are only required to make a small down payment of 3.50%. The number of mortgages now being funded with FHA premiums has increased by 33% over the course of the past three years.
Therefore growing concerns are being voiced over the rapid shift of risk onto the taxpayers that FHA guarantees may pose. As a result of falling home prices and increasing defaults, the capital reserves that FHA is required to maintain have fallen to unsafe levels, below 2% of the value of mortgages insured, calling into question the FHAs ability to make good on future defaults. The FHA has been in the process of reforming its lender approval process in an effort to eliminate any unstable players in the industry and will require FHA approved lenders to beef up their net worth requirements. However, in the end these reforms may do little to curtail the overall market related risks putting downward pressure on real estate prices, including the effects of an unstable job market, which are moving in tandem to steadily increase the number of loan defaults. Many industry analysts feel a federal bailout could become a reality though it would not approach the same level of taxpayer funding required to prop up fledging GSEs, Fannie Mae and Freddie Mac.
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