FHA keeps financing afloat
By KEVIN POST Business Editor, 609-272-7250 | Posted: Sunday, September 20, 2009
The housing slump has been characterized by falling home prices, rising foreclosures and a scarcity of buyers.
But despite collapse of the market for mortgage-backed securities and the subsequent credit crisis, financing has remained available, thanks in large part to the Federal Housing Administration.
Created to assist the housing market during the Great Depression, the FHA returned to the front lines in this severe recession by backing bigger mortgages with fewer requirements.
While it has succeeded in that battle, its own financial position has been wounded, enough to raise questions about whether it will need to raise premiums, seek money from Congress or tighten its lending support.
On Friday, the FHA admitted its finances have eroded beyond legal requirements, but insisted such steps wouldn't be needed for now. Instead it proposed increasing the net worth required of lenders and requiring them to take responsibility for fraud by mortgage brokers with whom they work.
The FHA's success has been considerable. As of midyear, it was insuring 18 percent of U.S. home purchases, up from 4 percent in 2006, according to federal Housing and Urban Development figures.
In New Jersey, FHA loans jumped from 9,724 in 2006 to 38,123 last year - and 39,881 this year so far, according to Lemar C. Wooley, HUD spokesman.
Megan Booth, a senior policy representative for the National Association of Realtors, said Wednesday that FHA is currently providing (through its guarantees) more than 30 percent of mortgage money.
"The FHA is critical to the industry right now," Booth said.
Tom Kimble, a Realtor with Balsley Losco in Northfield who has guided $350 million in sales in the past 25 years, put it more bluntly: "FHA has been our savior."
If anything reduced its availability, "it would be a dagger in the heart of our recovery," he said. Booth said a number of changes to the FHA program in the past couple of years have made it a key source of mortgage money.
The most important was an increase in loan amounts eligible for FHA insurance. Instead of a blanket $362,000 limit, FHA now sets amounts based on market prices. For the Atlantic City market, Booth said, the FHA limit is $453,750.
Other changes are not as well-known, even within the industry, she said.
Formerly, FHA had its own strict appraisal guidelines, but now only requires using an FHA-approved appraiser following conventional guidelines, she said.
FHA used to require a wide variety of repairs to be made to properties in order to qualify, she said, while now only repairs related to health and safety must be done.
Booth and Kimble both noted one chief appeal of FHA-backed mortgages: down payments of as little as 3.5 percent.
Sellers can contribute as much as 6 percent of the home's cost to cover closing costs, and there is no minimum credit score for buyers, Booth said.
But as FHA-insured mortgages have become more popular in the recession, the agency has had to pay off on that insurance more often. As of June, 8 percent of FHA loans were delinquent or in foreclosure, according to the Mortgage Bankers Association.
FHA's reserves to cover its insurance losses fell from 6 percent in 2007 to 3 percent in 2008 - just more than the 2 percent minimum reserve required by the legislation authorizing the FHA.
FHA Commissioner David H. Stevens said Friday that the agency's annual review at the end of this month will show its reserves have fallen below the 2 percent threshold.
Booth said the NAR will support an increase in FHA premiums to build up the reserves if necessary - even though that would add to the cost of homeownership, something the Realtors rarely support.
She said that even in the unlikely event that FHA needed to go to Congress for some sort of taxpayer-funded support, the NAR would stand behind it. "It's a very important source of funding," she said.
Kimble said he believes FHA may be moving beyond its problems.
"The defaults are probably from business written a year ago or earlier," he said. "The ones being written right now are from a solid group of borrowers."
Kimble said there are good signs in the real estate market, including the beginnings of a reduction in inventory. But there is also worry.
"We're being told that there's a whole crop of short sales and foreclosures being held back because (banks) don't want to flood the market," he said.
To ensure the nascent recovery continues, Kimble would like to see the successful $8,000 tax credit for first-time buyers renewed and extended to all buyers.
But at the very least, nothing should be allowed to impair the crucial finance work of FHA, he said.
"We'd come to a screeching halt and find ourselves in trouble in a jiffy," he said.
E-mail Kevin Post:
KPost@pressofac.com
Source: pressofAtlanticCity.com