Home loan borrowers of limited means might again be able to obtain FHA-backed home loans instead of going to more expensive subprime lenders if Congress gives the Federal Housing Administration greater discretion in deciding what types of loans it will back.
In areas of the country where the cost of housing is high, the FHA has lost market share because of limits on the size of loans it can insure. And a statutory requirement of a 3 percent down payment for FHA-insured loans is difficult for some low-income buyers to meet.
The Expanding American Home Ownership Act of 2006 would address those issues by allowing the FHA to insure bigger loans with more flexible terms, including no-money-down products.
Approved by the House in a 415-7 vote in July, HR 5121 could help FHA regain the market share it’s lost to subprime lenders.
Between 2000 and 2004, FHA’s share of single-family loan originations declined from 16 percent to 5 percent, and its share of total mortgage debt fell from 20 percent to 9 percent. The market share of subprime lenders increased from 2 percent to 11 percent of total loans outstanding during the same period, according to a report conducted for the Mortgage Bankers Association.
The report, “Lender Perspectives on FHA’s Declining Market Share,” surveyed mortgage bankers who identified a lack of FHA product offerings, including a zero-down-payment product, as factors. There’s no disagreement on that point from FHA officials.
“The data actually shows that while our market share declined, subprime grew exponentially, particularly for minority and first-time home buyers,” said Margaret Burns, director of FHA’s Office of Single Family Program Development.
“We have vanilla or we have chocolate, that’s it,” agreed Bill Glavin, special assistant to FHA Commissioner Brian Montgomery.
In areas of the country where the cost of housing is high, the FHA has lost market share in part because of limits on the size of loans it can insure. In high-cost areas, the FHA can only insure loans up to 87 percent of the limits set for set for government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. The conforming loan limit for GSEs, which is adjusted annually, currently stands at $417,000 — meaning FHA can’t back single-family home loans greater than $362,790.
With the median priced home in California now selling at well over $500,000, FHA has been priced out of that market. The FHA only insured 5,000 mortgages in California in 2005, down 95 percent from the 109,000 loans it backed in the state in 2000.
In areas where housing isn’t as costly, the FHA limit is 48 percent of the GSE maximum, or $200,160. HR 5121 would allow FHA to insure loans in low-cost areas up to 65 percent of the GSE conforming loan limit, or $271,050.
The Senate version of the Expanding American Home Ownership Act, S 3535, has been referred to the Committee on Banking, Housing and Urban Affairs. Private mortgage companies are reportedly lobbying for changes in the bill. Some critics have said that allowing FHA to offer no-money-down loans will only encourage borrowers to take on debts they can’t afford.
“I think that’s one mistake people might make — that we’re trying to help people who shouldn’t be homeowners, who aren’t credit worthy,” Burns said. Lenders today are better able to judge a borrower’s ability to repay a loan, which is a more important factor in assessing credit risk than the amount of the down payment, FHA officials said.
“Our underwriting standards will remain the same,” Burns said. “We just feel given the dynamics of the market today — 43 percent of home buyers last year put no money down, they want to buy new furniture, replace carpet, and there is nothing wrong with that — we want to offer them (the option of a zero-down loan) in a manner that’s safer and more affordable (than privately backed loans).”
In the past, a 3 percent down payment — $2,010 on the $67,000 home of yesteryear — was not necessarily an insurmountable obstacle to moderate-income home buyers. Today, the minimum down payment on the biggest FHA-backed loan is a more formidable $10,884.
The 3 percent requirement “goes back 25 years, when loan approvals were more subjective,” Glavin said. “Today, we have risk-management tools and statistics and we can do a better job of assessing the risk” on loans with lower or no down payments.
When the Mortgage Bankers Association surveyed members last year for insight into FHA’s declining market share, they also wanted the administration to be more flexible in backing cash-out loans, and streamline the closing and post-closing process to reduce their origination costs.
Burns and Glavin said FHA has addressed those issues, and that the Expanding American Home Ownership Act could also give the administration the ability to create risk-based insurance premium structure, matching premiums with borrowers credit profiles. Instead of charging a standard premium to all buyers, low-risk borrowers would pay less, and high-risk borrowers would pay more.
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