In the “you know that it was too good to be true” department, the Federal Housing Administration is about to make it more expensive and more difficult to get an FHA mortgage loan. Why? Money is drying up and the FHA believes it has to protect its very survival. Here’s the story.
Historically, the FHA has been a stable, but largely behind-the-scenes player in the U.S. mortgage market. According to the FHA’s own figures, the agency’s share of the new mortgage loan market was less than 4% back in 2006. That was when mortgage buyers were being lavished with “no doc, no down payment” loans from subprime lenders, and fewer consumers had any use for stable, 30-year fixed-rate mortgages.
But the FHA rode in on a white horse to offer U.S. mortgage customers loans with only 3.5% of the total mortgage needed as a down payment. The FHA approval guidelines were relaxed too. The agency approved mortgages for borrowers with lower credit scores than most banks were allowing. In addition, the FHA was more liberal on bankruptcies — forgiving them after two years, while ignoring a foreclosure once three years had passed.Mortgage customers got on board in a hurry, and by the end of 2008, the FHA was responsible for about 21% of the U.S. new mortgage market, according to figures released by the federal government under its Home Mortgage Disclosure Act. The agency is also currently responsible for 30% of mortgage refinancings, says the U.S. Department of Housing and Urban Development.
That growth has given the FHA a case of the willies, and now it’s about to do something about it, if the HUD has anything to say about it. In testimony to Congress last week, Secretary Shaun Donovan says that his agency is strongly considering steps to rein in mortgages issued by the FHA.
Already, HUD has taken some steps to beef up FHA’s financial credibility. It has suspended seven lenders, and withdrawn FHA approval for 270 other U.S. lenders. The agency has tightened requirements on its “Streamlined Refinance” program, offered new rules on appraisals and has hiked net worth minimums for all FHA lenders. HUD has also brought aboard a Chief Risk Officer to manage the agency’s risk vulnerabilities in the volatile credit market.