FHA faces setbacks: mortgage loan problems, poor economy

[Jan 19, 2010.]

 

FHA Commissioner David Stevens faces significant challenges as his agency continues making home loans affordable for buyers and homeowners who don't qualify for conventional mortgage financing. Although FHA, an agency of the U.S. Department of Housing and Urban Development (HUD), has seen its market share jump from 2 percent in 2006 to 25 percent as of the third quarter of 2008, the commissioner is concerned about the impact of such growth on FHA home loan programs.

Too much exposure, too many challenges?

FHA, which insures mortgage loans made according to its lending criteria, faces several hurdles in maintaining stable financial footing for its home loan programs:

• Dwindling reserves: Cash reserves available for reimbursing mortgage lenders for failed mortgage loans has fallen to about one-half percent of its current liability for insuring home loans. Congress requires FHA to maintain these reserves at a minimum of 2 percent.


• Inefficient Policies and Procedures: HUD Secretary Shaun Donovan asserts that current FHA problems are largely due to outdated credit and risk controls and lax enforcement of FHA lending requirements. FHA is addressing these issues by increasing mortgage lender audits and proposing several changes to its programs, including holding lenders accountable for FHA loans they acquire from mortgage brokers.


• FHA borrowers lack incentive to save their homes: With down payments as low as 3.5 percent, critics feel that FHA borrowers don't have enough investment in their homes to keep them from walking away when trouble strikes. FHA is considering a proposal to increase its minimum down payment/equity requirement to 5 percent of current home value.

When considering our nation's ongoing economic woes, it seems unlikely that increasing the minimum down payment for a home is going to help reduce FHA exposure to mortgage defaults stemming from long term unemployment and stagnant housing markets.

Who gets to own a home?

Conventional mortgage lending guidelines typically require good to excellent credit and a down payment of 20 percent of current home value. FHA programs provides home loans for borrowers who have steady incomes, but don't have 20 percent down, or in the case of refinancing, don't have sufficient home equity to qualify for a standard refinance mortgage.

FHA plays a leading, if not solo, role in providing access to home ownership to moderate-income families. As bankruptcy and foreclosure rates skyrocket due to job losses and long-term unemployment, mortgage lenders may need to revise underwriting requirements to accommodate large numbers of borrowers with compromised credit. In any case, FHA home loan programs are essential for supporting communities, housing markets, and families striving to achieve and maintain home ownership.

 

About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.