Borrowers are flocking to government-insured loans, particularly those offered by the Federal Housing Administration, as they seek to refinance out of costly adjustable-rate mortgages or take out purchase loans with low down payments.

The Mortgage Bankers Association says applications for government-insured loans were up 133.9 percent in July from a year ago, while applications for conventional loans like those purchased and guaranteed by Fannie Mae and Freddie Mac fell 50.2 percent.

Ginnie Mae, which securitizes FHA loans, is surpassing Fannie and Freddie in issuance of securities backed by fixed-rate mortgages during August, the blog reported, citing data from eMBS Inc.

FHA loans typically have lower down payments than those offered by Fannie Mae and Freddie Mac, the MBA noted, with a 97 percent maximum loan-to-value (LTV) ratio for FHA loans compared with 95 percent for Fannie and Freddie. Conventional loans also tend to have higher credit score requirements than FHA loans.

In addition, Congress and the Bush administration have expanded FHA loan guarantee programs by raising loan limits and creating new products that allow borrowers who are behind on their existing mortgage refinance into more affordable loans.

The share of loans guaranteed by government programs such as FHA and VA has been increasing since February 2007, but that growth has accelerated this year, the MBA said. Applications for government-insured loans, which hit a low in August 2005 with a market share of 5.8 percent, accounted for 29.1 percent of mortgage applications in July, compared with 8.4 percent a year ago and 9.4 percent in January.

The level of conventional to FHA refinance applications was up 317 percent in July from a year ago, and most of that business is likely to be borrowers refinancing out of subprime ARMs, the MBA said. The number of loans guaranteed rose more modestly — 261 percent — because not all applications are approved.

"The higher application and endorsement activity for government-insured loans highlights the need for FHA modernization," the MBA said of recently approved legislation that’s intended to make the FHA approval process more streamlined and efficient.


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