FHA (don’t call it a) Comeback: Changes to Limits, Down Payment Forthcoming

by Alex Stenback on September 18, 2007

Fha
With credit standards tightening and the sub-prime and Alt-A market all but dead, the good old FHA Mortgage is poised to enjoy a new day in the sun, coming back into favor for
home buyers and for those refinancing their way out of sub-prime
trouble

This resurgence is now
likely to get an additional boost.  According to
our sources, the senate banking committee has reached an agreement on
FHA "Modernization."

Once the loan program of choice for first-time buyers with limited credit histories and down payments, FHA home loans have lost market share to zero-down payment programs offered by the Government Sponsored Agencies (GSE’s: Fannie Mae and Freddie Mac,) as well as the the sub-prime and Alt-A markets.  How much market share has FHA lost? As recently as 2002, FHA purchase money originations accounted for 13% of the market.  In 2006 that share had dwindled to just 3% of purchases nationally (source: Credit Suisse).

The long-anticipated FHA Modernization effort has focused on key areas that have hurt FHA’s market penetration.  Mainly, low loan amount limits, which have not kept pace with median sales prices in many, especially coastal, markets, and the 3% down payment requirement.

We have it on good authority that the senate banking committee has agreed in principle on the following changes:

Limits to increase – the "floor," or lower limit will be increased from $200,160 (48% percent of the conforming loan limit of $417k) to $271,050 (65% of conforming limit.)  The "ceiling" will be increased to the conforming limit of $417,000.00.  [Quick aside: FHA loan amount limits are adjusted for each market, so some high cost areas will have higher limits, others lower.  All this "floor and ceiling" stuff just sets the boundaries.]

Down Payment Reduced: From the current 3% borrower contribution to 1.5%

These revisions have some to go (House votes, markups, and other associated ring kissing and political maneuvering) before the becoming law, though most expect that a bill broadly matching the above will be signed within the next 30 days.  This is all but a done deal folks.

Though FHA will still have some competitive disadvantages, (like overly paternalistic property condition requirements that turn-off many sellers.) These changes, combined with the FHA secure program for sub-prime refugees, may very well make FHA a first option (rather than a last resort) for many first time buyers (though some of us have been lending in this space all along.)   These changes are a net positive for everyone.

Also, we must add:  Part of the reason we are dealing with such a mess is that many many many sub-prime borrowers (who were good and well eligible for FHA loans in the first place) had the misfortune of being steered into a non FHA mortgage.  Many lenders do not, or cannot originate FHA loans, usually this was because they were either a) Not interested in making FHA loans because they aren’t as profitable as sub-prime, or b) Could not meet minimim standards required as an FHA approved lender.

{ 1 comment… read it below or add one }

North Carolina Mortgage October 8, 2007 at 2:21 pm

hopefully the new changes will help the economy

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