Agency Is Becoming Centerpiece of Bid To Prop Up Housing
By JAMES R. HAGERTYMarch 6, 2008; Page A4
The Federal Housing Administration, a relic of the Great Depression that dwindled to near irrelevance in recent years, is suddenly emerging as the centerpiece of government efforts to prop up the housing market.
Home loans insured by the FHA have become the cheapest and, in many cases, the only alternative for borrowers who can make only a small down payment. The agency is rapidly gaining market share as government-sponsored mortgage investors Fannie Mae and Freddie Mac, stung by combined losses of about $9 billion in last year's second half, back away from credit risks by adding fees and demanding higher down payments.
The FHA doesn't make loans but provides insurance, which covers the risks of default for lenders or investors who own loans. That insurance is akin to the guarantees provided by Fannie Mae and Freddie Mac.
Policy makers see the FHA as one of the handiest tools available to keep money flowing into mortgages at a time of growing anxiety about the effects of soaring defaults and falling home prices.
Federal Reserve Chairman Ben Bernanke this week suggested giving "greater latitude" to the FHA on terms for insuring refinanced loans so the agency could "help more troubled borrowers." Rep. Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, has called for a greater federal role in refinancing or buying distressed loans that are written down by lenders and said the FHA is likely to play a big role in that process.
"The FHA's role is going to be huge," says Brian Chappelle, a mortgage consultant who was a senior FHA official in the early 1980s. Some lenders expect the FHA to account for as much as a third of new mortgages by the end of this year, Mr. Chappelle says. That would be up from a low of 1.8% of single-family mortgage originations in 2005 and 2006, according to trade publication Inside Mortgage Finance.
The agency has long been seen as a means to help lower-income borrowers but now attracts some well-heeled people, too. At Toll Brothers Inc., a builder of homes with an average price of around $650,000, executives say more of their buyers may soon be using FHA-insured loans.
The FHA is in some ways returning to its roots as a broad-based tonic for the housing market. When Congress created the FHA in 1934, many banks were failing and housing production had collapsed. Initially, the FHA could insure loans of as much as $16,000, or about triple the median home price at that time, allowing it to serve most of the market. Congress in later decades directed the FHA to concentrate more on the entry-level housing market.
Over the past four months, Fannie and Freddie have imposed fees that lenders have to pay upfront so that loans can be guaranteed by the two companies. Those fees are passed on to borrowers and typically result in slightly higher interest rates. Fannie and Freddie also have increased down-payment requirements in areas where house prices are falling. The FHA hasn't changed its terms and allows down payments as small as about 3% nationwide.
FHA loans now are slightly cheaper than conventional loans backed by Fannie and Freddie, a reverse of the normal situation. Last week, the average rate on FHA loans was 6.29%, while conventional loans were at 6.36%, according to HSH Associates, a publisher of financial data.
The FHA's broader role exposes it to more risks, stirring fears that taxpayers ultimately may have to bail out the agency. The FHA is "underpricing for the risk that they are taking on," says Thomas Lawler, a housing economist in Leesburg, Va., who formerly worked for Fannie Mae.
FHA officials counter that the FHA requires borrowers to document their ability to repay loans and has never needed a bailout for its single-family mortgage program. "The FHA is playing exactly the role it's supposed to play," maintaining the flow of mortgage credit, says Meg Burns, a senior official at the agency. "We need to be there as a backstop."
Ashley Jones, a 23-year-old who works for an urban-redevelopment organization in Kansas City, Mo., was delighted with that backstop. On Monday, she locked in a fixed interest rate of 5.5% on a 30-year mortgage to be insured by the FHA. "It's just a fantastic deal," says Kerry Thomas of mortgage bank James B. Nutter & Co., who is arranging the loan. Ms. Jones would have paid about 5.75% for a conventional loan and would have needed to put down 5% of the home value, instead of the 3% she will need for the FHA loan, says Ms. Thomas.
The economic-stimulus bill passed by Congress and signed by President Bush last month raises the ceiling on the size of loans the FHA can insure to $729,750 in the highest-cost areas from a previous cap of $362,790. The new limits are due to expire at the end of this year. By then, however, Congress is likely to have enacted legislation that would permanently raise the loan limits, though perhaps by a lesser amount.
Yesterday, the Department of Housing and Urban Development, which runs the FHA, announced the new temporary loan ceilings in California. Details for the rest of the country are due to be announced this week, perhaps today. The California loan caps range from $271,050 in lower-cost areas such as Lassen and Trinity counties to $729,750 in high-cost counties in the Los Angeles and San Francisco areas.
Those upper limits also will apply to loans purchased or guaranteed by Fannie and Freddie, HUD officials said. Even in low-cost areas, Fannie and Freddie can handle loans of as much as $417,000.
Sarah Bulla, who lives in Cincinnati, has a strong credit record and earns more than $100,000 a year as a sales manager for suppliers of intravenous fluids. Matthew Buss, her loan officer at 1st Metropolitan Mortgage, a broker in Charlotte, N.C., says he wouldn't have considered an FHA loan for such a borrower a year ago. But he says it's now easily the best option for Ms. Bulla, who wants to refinance her home with a loan covering 95% of the estimated value, allowing her to take out some cash for home improvements.
The FHA could raise its insurance prices. For now, all borrowers with FHA-insured loans must pay an up-front fee for that insurance equaling 1.5% of the loan amount. Then they need to pay additional fees of 0.5% per year based on the outstanding loan balance. (If borrowers make payments for five years and the loan balance falls to 78% of the original value of the property, the annual fee is no longer due.)
The FHA also allows sellers to provide more sweeteners to buyers, such as by paying loan-closing costs, which can be crucial in a weak market. Such concessions on FHA-backed loans can be as much as 6% of the home's sale price; for low-down-payment loans backed by Fannie or Freddie, the maximum allowed for seller concessions is 3%.
FHA Mortgage Limits in California
Median Home Price | FHA Limit | |
$995,000 | $729,750 | |
Alpine County | 438,000 | 547,500 |
355,000 | 443,750 | |
320,000 | 400,000 | |
370,000 | 462,500 | |
318,000 | 397,500 | |
995,000 | 729,750 | |
Del Norte County | 249,000 | 311,250 |
464,000 | 580,000 | |
305,000 | 381,250 | |
230,000 | 287,500 | |
315,000 | 393,750 | |
260,000 | 325,000 | |
350,000 | 437,500 | |
295,000 | 368,750 | |
260,000 | 325,000 | |
321,000 | 401,250 | |
200,000 | 271,050 | |
710,000 | 729,750 | |
340,000 | 425,000 | |
995,000 | 729,750 | |
330,000 | 412,500 | |
410,000 | 512,500 | |
378,000 | 472,500 | |
125,000 | 271,050 | |
370,000 | 462,500 | |
599,000 | 729,750 | |
615,000 | 729,750 | |
450,000 | 562,500 | |
710,000 | 729,750 | |
464,000 | 580,000 | |
328,000 | 410,000 | |
400,000 | 500,000 | |
464,000 | 580,000 | |
790,000 | 729,750 | |
400,000 | 500,000 | |
558,000 | 697,500 | |
995,000 | 729,750 | |
391,000 | 488,750 | |
550,000 | 687,500 | |
995,000 | 729,750 | |
615,000 | 729,750 | |
790,000 | 72,9750 | |
719,000 | 729,750 | |
339,000 | 423,750 | |
228,000 | 285,000 | |
235,000 | 293,750 | |
446,000 | 557,500 | |
530,000 | 662,500 | |
339,000 | 423,750 | |
340,000 | 425,000 | |
250,000 | 312,500 | |
200,000 | 271,050 | |
260,000 | 325,000 | |
350,000 | 437,500 | |
599,000 | 729,750 | |
464,000 | 580,000 | |
340,000 | 425,000 |
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