During the most recent three years, FHA-Insured mortgages in terms of market share increased from less than 20% to the latest figures putting it over 50%, a quick and explosive increase which began at the end of first quarter in 2007 up to and including the first quarter of 2010. In the absence of sub-prime loans which as we now know were based on very imprudent lending practices, FHA loans are now heavily relied upon to finance the bulk of the nation’s residential housing financing needs.
Although the market continues to be sluggish during this “non-recovery-recovery” economic period, the fact is that there are still homes being sold and home loans being originated, processed and closed; and the loans most often utilized by lenders and buyers alike are FHA home loans. The demand for home loans has increased slightly from this time last year and the longer these increases continue, the more demand for FHA loans will increase proportionately. The question is, will the FHA be able to meet that demand.
You may ask, what happened to the traditional conventional loan? And you would be correct in the assumption that conventional home loans are readily available also as a means of providing home loans for meeting increasing demands, except that the reason subprime mortgages gain popularity in the first place was due to the rigid guidelines under which conventional loans were underwritten as well as the out-of-pocket (cash) requirements home buyers had to meet in order to get a conventional home loan. Those guidelines, although modified in recent years, are still rather prohibitive (20% down payment without PMI, 720-760 credit score, reduces to a full 10% a home buyers gross monthly income for “housing expense ratio – PITI”).
While a home purchaser has to invest a very huge amount of money to support and maintain the home and protect his/her investment – although these days there are those who will dispute the investment idea – over the long term, many proponents of affordable housing, including some mortgage lenders, belieeve that as long as a borrower is steadily employed and has been for previous two consecutive years; can show a history of managing credit responsibly; and have save at least 3.5% of his/her own funds for down payment, s/he ought to be able to own a home.
For many years the FHA shared that view, but what plagued FHA home loans during the two decades from 1980 to 2000 was the “maximum loan amounts” they were willing to insure, which is the reason PMI and Subprime companies gained prominence in the mortgage markets in the first place. PMI (private mortgage insurance) served as a bridge between the 20% down payment required to be qualified for conventional loans, and the 2.25% to 3.5% (most recent) needed to qualify for a FHA home loan. PMI loans, as extensions of the conventional loans were processed and underwritten using the same loan maximums that existed on the conventional loans and therefore garnered a substantial market share while FHA loans could not be approved and closed due to the same maximum loan restrictions, or low appraisal, or expensive repair work they demanded the home seller to complete as a condition of closing the sale of his/her home. Oh did that infuriate those poor home sellers. The problem today is different.
Today there is more of a demand for FHA home loans than at any time during the last quarter century and the question is whether or not that demand will or can be met by today’s FHA. It is common knowledge by now that FHA (Federal Housing Administration) is a government agency under the HUD (Housing and Urban Development) umbrella and as such must adhere to, promulgate and uphold laws which govern the lending process, including FCRA, RESPA and most recently S.A.F.E. just to name just a few.
Having said that, it is reasonable to assume that as the federal government goes, so goes FHA, therefore the question regarding meeting the increasing demands of the residential home loan industry is not an easy one to answer since the government must first be restored to 100% economic health. If I had to bet on FHA home loans meeting that demand though, my money would be place on the FHA meeting the demand and remaining a viable force in the home loans market for many years to come – perhaps another 75.
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For more about 203k, please visit the HUD website.
If the government can’t run business, how come businesses always run to the government for a bailout when it runs into trouble? FHA-insured mortgages, government run for 75 years. Lest we forget?