Tag Archives: fha loans

Is FHA’s Increasing Market Share A Good Thing?

“When everyone else is greedy, be scared. And when everyone else is scared, be greedy.” – Warren Buffet

In the last quarter, almost half of all mortgages were FHA insured mortgages. There are some that think such large government involvement in the mortgage market is bad for the housing market and its participants. I am not one of these people. I believe that it is beneficial for FHA to be increasing their market share of the mortgage market for the reasons I’m about to list.

To begin with, FHA does not issue mortgages. What FHA does do is insure them in the event of default by a borrower. Virtually every single consumer bank in the United States funds the mortgage, and then obtains an FHA insurance certificate that attaches to the loan, provided that loan is underwritten according to FHA loan guidelines.

So why should FHA be insuring so many mortgages? First of all, if they weren’t, about half of the mortgages would not be funding. Think of the debacle this would create. Values would get whacked even more, more REO inventory would pile up, and we would be experiencing a severe double dip housing bust. Not a good thing for anyone in the real estate market.

The reason why there should be no fear of the government’s increasing role is because the loans that they are now insuring will perform. The borrowers who now qualify, really qualify, and now can no longer state income and assets and obtain a loan. Further, values have come crashing down to reality and rates are at historic lows, two important events that converge to give them a payment that closely approximates what the fair rental of the property would be, thus providing an exit strategy, something homeowners of the past never considered. So now, if a borrower loses his job and can no longer afford the house, he can rent it instead of walking away from it. I never understood how buyers in the past could buy a home that left them with a $4,000 a month payment, when that same house only rented for $1,800. No exit strategy! Not much thinking either. And of course they didn’t have very good council, because the person they sought out to handle the financing for the most important contract they would ever sign, was the twenty four year old “loan officer” who was the friend of a friend, not a seasoned professional with the expertise and experience to guide them.

In addition, the quality control that is in place should prevent those who don’t qualify from getting a mortgage, and should eliminate the rampant fraud and criminal activities that led to all the mortgage problems in the first place. FHA lenders now verify the income that a borrower claims to make with the IRS. This is done by completing and validating IRS for 4506T, which provides the lender with a transcript of the applicant’s filed tax return.

Lenders (and FHA) need to be vigilant in one other area of quality control, and that is appraisal. Appraisal procedures have seen dramatic changes in the past two years, most of them for the better. However, a lender needs to have in house appraisal review of the appraisal submitted with the loan. This will ensure that any stretching of values or any monkey business with the appraisal is discovered, and the offending party will get on the kind of list he doesn’t want to be on.

FHA’s market share is going to increase due to other factors. Fannie Mae and Freddie Mac have been bailed out to the tune of 170 billion dollars and counting, and many doubt these GSE’s ability to survive their current financial problems.

Finally, recent financial overhaul legislation requires the lenders of non-fha mortgages to retain a five percent “skin in the game” for every mortgage they originate, which is going to stifle non-FHA lending. FHA should heed Warren Buffet’s advise, because everyone else is scared right now.

Homeowners Associations Can No Longer Ignore FHA Approval

The screaming and cursing you hear in unit 404 isn’t coming from Mr. Armbrister’s television—Armbrister has just learned that another potential sale of his condominium unit fell through due to the buyer’s inability to obtain financing. In this case, the buyer wanted to purchase Armbrister’s condo unit with an FHA loan—Armbrister’s homeowners association, however, had neglected to obtain FHA approval.

FHA loans, which are mortgages insured by the Federal Housing Administration, accounted for a mere 1.7% of new mortgages as recently as 2006. Today, almost half of all new mortgages are FHA—yet there are still many misconceptions associated with their use and their benefits.

Due to the elimination of ‘spot approval’ in February 2010, an entire condominium development must now apply to the Department of Housing and Urban Development (HUD) and be granted FHA approval before someone can purchase or refinance a unit using an FHA loan. Before its elimination, spot approval allowed an FHA buyer or refinancer to conduct a transaction in a specific condominium unit located in an unapproved complex.

Management companies and homeowners associations constantly ask why their condominium developments should seek FHA approval. A recent survey of more than 12,000 home buyers conducted by the Home Buying Institute indicated that the vast majority of respondents (87%) planned to use an FHA loan for their purchase. Given the prevalence of FHA loans in today’s housing market, the simple answer is that unit sellers in an association without FHA approval are severely limiting the pool of potential buyers. Thanks to the law of supply and demand, fewer possible buyers mean units will often sit on the market for longer periods and sell for lower prices. Even non-sellers are affected as lower sales prices for neighboring units often result in lower appraised values for all units.

Why have we seen such a surge in FHA borrowing? First, the general unwillingness of today’s lenders to extend credit and an almost complete withdrawal of private capital from the home mortgage sector forced HUD and FHA to take action. They ultimately crafted policies to increase FHA availability in order to help stabilize the housing market. FHA loans encourage lenders to lend, assuring them that they will be paid back by the federal government in case of default.

Second, as many residential real estate agents know all too well, the sudden and inevitable collapse of the high-risk subprime mortgage industry left a tremendous void in the marketplace for those buyers that did not have the 20% downpayment typically required when obtaining a conventional loan. This void is nicely filled by FHA loans, which require as low as a 3.5% down payment.

Finally, the significant increase in the maximum FHA loan limits from $362,790 to $793,750, means that an FHA loan is now relevant and appropriate for a much greater percentage of home purchases and refinances than ever before.

In addition to the benefits discussed above, there are other features inherent to FHA loans that help explain their newfound popularity. Credit requirements are less stringent than is the case with conventional loans. Also, FHA loans are fully assumable, meaning that a seller with a current FHA loan can offer the financing and terms to a buyer during resale. Assumability will be a great benefit to a future seller when interest rates turn higher.

Despite FHA’s easier down payment and credit qualifying guidelines, associations should not fear that FHA loans are risky and real estate agents should feel comfortable suggesting them as an option to their clients. “Full documentation” requirements ensure borrowers are fully vetted for their ability to afford the property in question. With the required income and asset reporting demanded by FHA, foreclosure rates have been historically lower than for those with any other type of loan—a fact that should give homeowners associations peace of mind.

Associations and management companies should further investigate and consider all of the benefits that FHA loans provide. Real estate agents should be prepared to help their clients navigate the process, as it will only help increase sales in a tricky market.

Christopher Gardner is the Founder and President of FHA Pros, LLC. He may be reached at cgardner@fhaprosllc.com.