FHA -- That's Housing -- Is Back in Demand
Sunday, March 8, 2009
When the housing market sizzled, the Federal Housing Administration was nothing more than an afterthought for borrowers in need of a mortgage -- if that.
"A lot of people thought we were the Federal Highway Administration," Brian Montgomery, the agency's departing commissioner, told a Senate committee last year.
But after the mortgage crisis erupted, the agency that runs the government's mortgage insurance program got pushed back into its Depression-era mission of reinvigorating an ailing housing market.
"In 1934, the federal government intervened by creating FHA and redefined housing finance in America," said Nicolas Retsinas, a former FHA commissioner. "Everyone was losing their jobs, and lenders didn't want to make loans without a 50 percent down payment. FHA stepped in and said: 'If you follow certain underwriting guidelines, we guarantee we will cover the balance of the loan if it goes bad.' "
The same principle holds today.
The FHA protects the lenders it works with against loss if borrowers default, and the borrowers pay premiums to cover those losses.
Although the lenders decide who to loan money to, the FHA sets some rules. For instance, it bars lenders from imposing prepayment penalties. It requires borrowers to document their income and come up with at least a 3.5 percent down payment. Those refinancing must have that much in equity.
The agency's core customers remain first-time buyers and low- to moderate-income families. But its reach now extends beyond marginal borrowers to just about anyone who has been shut out of the market as lenders tighten their standards for conventional loans. The FHA also insures loans for multifamily housing and hospitals, but its flagship home insurance program remains its largest business and the 30-year, fixed rate mortgage its standard loan.
When credit was easy during the housing boom earlier this decade, borrowers saw little reason to subject themselves to the FHA's conditions and the agency lost relevance.
"Now, it's a tremendous deal," said Guy Cecala, publisher of Inside Mortgage Finance. "It's the same old FHA, but it's looking pretty good for people who don't have a lot of other options."