Is the boom in FHA Lending a cause for concern? Nearly 20% of all new mortgages now insured by government agency. The Texas mortgage shakedown of the subprime mortgage industry and its fallout on conventional lenders has led to such a boom in business at the Federal Housing Administration that the agency is now insuring nearly one in five new residential mortgages, helping salvage some neighborhoods in some of the nation’s battered real estate markets.

The FHA’s surge in business, which includes many loans to high-risk borrowers who put just 3 percent down in markets where real estate prices are in decline, raises questions about a potential hit to taxpayers in the future. An FHA spokesperson however said there is no cause for concern and that FHA is doing very well and that they expect to continue with current FHA lending programs as is.

My concern with the FHA boom is that values are dropping and nobody’s got a safety net and that’s what worries me about FHA lending. The tax payers are taking on a lot of risk that use to be on the private sector. Look at some of these alarming FHA Lending Stats:

• FHA’s single-family market share has skyrocketed to 17 percent, a nearly six-fold increase in the last two years.This will only continue with current mortgage crisis.
• The volume of FHA-insured single-family mortgages, for both purchases and refinances, has risen from an average of $4.9 billion a month in fiscal 2007 to over $24 billion in the last quarter — a pace that threatens to surpass the agency’s congressional authorization of $180 billion in new business for the year.
• FHA currently insures 4.4 million single-family mortgages — or about one in every 10 U.S. home mortgages, with a total unpaid balance of $474 billion.

FHA borrowers typically have less mone for down payments and poorer credit than conventional borrowers. While most FHA loans require down payments of at least 3 percent, the entire amount can be a gift from a friend, a relative or other sources as long as it isn’t from the seller. The FHA does not set minimum credit scores for borrowers and allows them to have less than stellar credit that would prevent them from obtaining conventional loans.

When subprime lending dried up at Lone Star Financing, FHA quickly became a good option for many of our borrowers, including some with good credit and larger down payments. Across the nation, lenders and mortgage brokers that sell FHA products ramped up that part of their business.

Only time will tell if the subprime debackle will bleed over to FHA lending and tax payers bear the burden of the looser lending practices of the FHA programs.
 

Filed under: Mortgage Industry