FHA Loans Emerge From the Sidelines

Douglas Vazquez was able to buy a $400,000 condominium with a low down payment, thanks to a Federal Housing Administration loan. (By Leah L. Jones For The Washington Post)

"We didn't have a stash of money in the bank or stocks to cash out," Abby Morris said. "We were depending on our income potential and our history of on-time payments to help us qualify for a loan."

When that didn't happen, the couple planned to withdraw their offer until Kerry White, a loan officer at Prosperity Mortgage in the District, told them about the new FHA loan limits.

"A year ago, this couple would have had no problems getting financing," White said. "But because of the tightening mortgage climate, their loan options dried up. . . . FHA became an obvious alternative."

The FHA does not lend money directly. It provides mortgage insurance to borrowers through private lenders. That means the FHA will pick up the tab for defaulted loans using premiums it collects from all of its borrowers.

The agency lost relevance when home prices soared and borrowers turned to subprime loans with lower upfront costs. When those loans started defaulting at an alarming rate, many subprime lenders shut down and the FHA started slowly regaining its footing. Its market share is now about 10 percent, up from 2 percent in 2005, according to Inside Mortgage Finance, a trade publication.

Most of FHA's business now comes from refinancing. During the first three months of this year, nearly 60 percent of the 15,000 loans that FHA insured in Maryland and Virginia were for borrowers who were refinancing, federal data show. Some of them turned to FHA to get out of loans that were becoming too much to handle.

Among them was Petrina Chesson, who was anxious to get rid of a burdensome subprime adjustable rate loan. She got that mortgage two years ago and pulled out cash for improvements on her D.C. townhouse.

But the loan's interest rate reset last month, and her monthly payments climbed to $3,497 from $3,069. Chesson never fell behind on her mortgage but feared she would.

"Things were getting tight, and I was getting worried," Chesson said. "I just wanted a 30-year fixed loan, and no one would give it to me until Bank of America helped."

Her new loan will consolidate her other debts so that her total monthly payments will be $3,290. Her mortgage makes up $3,002 of that total.

Although the FHA is starting to recapture borrowers it lost to subprime lenders, its loans do not have the features that drew borrowers to subprime loans but later turned problematic.

Only borrowers who can make at least a 3 percent down payment or have at least 3 percent equity in their homes and who can document their income can qualify for FHA loans.