CaliforniaPurchase Rates30 Year FHA

FHA: Is the Agency Next on the Government’s Bailout List?

The Federal Housing Agency (FHA) currently insures over 5 million mortgages, up about 30% when compared with levels from three years ago. In 2006, FHA accounted for approximately 9% of the purchase mortgage market, by late summer of 2009, that share had grown to almost 40% with a total of $675 billion in insured mortgages. Following the destruction of the sub-prime market, FHA moved in to help pick up the pieces where the insolvent GSEs (Fannie Mae and Freddie Mac) and the private sector left off. The “temporary” increase in the conforming loan limit (to $729,750) in conjunction with the collapse of the private market for the securitization of mortgages had much to do with FHAs explosive growth as they are now insuring almost 6,000 loans each day.

FHA does not make loans directly but provides insurance against mortgage default. FHA’s popularity amongst first time buyers is long standing because of their low minimum payment requirement of 3.5%, which was increased recently from 3%. Concerns are being voiced now that FHA has breached its mandatory financial requirements for the first time in 75 years, as the agency’s capital ratio has fallen below 2% of the total value of its insured mortgages. Because a number of players from the sub-prime market have transitioned into the FHA market, this has led industry insiders to label FHA “the new sub-prime”. However, the majority of FHA loans have been issued to borrowers with higher credit scores than had been the traditional FHA norm, in fact prime borrowers account for more than 60% of FHA purchases, in direct contrast to the sub-prime claims. This new influx of prime borrowers into the FHA market appears to be a direct result of absorbing both originations that would have previously been considered non-conforming (loan amounts above $417,000) and beyond the limit of the two GSE giants Fannie Mae and Freddie Mac, as well as taking on the originations of the disbanded sub-prime market.

However the total number of loan originations considered to fall into the sub-prime category has dropped off considerably from almost 30% in 2006 to slightly under 12% in 2008. FHA claims it has not experienced a material increase in the percentage of sub-prime loans that it insures and that the year over year increase is only 2 tenths of one percent from 2007 to 2008. At one time FHA had required a minimum down payment of just 3%, that minimum has increased 0.5% to 3.5% and those borrowers putting down less than 20% are required to obtain private mortgage insurance or PMI. Yet the median loan-to-value of the total portfolio of FHA loans remains above 97%, which means that the majority of FHA borrowers have less than a 3% equity position in their home. With this little equity, FHA borrowers are likely to be extremely susceptible to a further decline in home prices as well as further job losses. FHA’s risk becomes the taxpayer’s risk in the event that this vast pool of borrowers, having little to no equity in their homes, begins to default on their mortgage payments for any number of reasons.