FHA, or the Federal Housing Administration, almost vanished from the home loan scene a few years ago when conventional mortgage lenders came up with their own attractive loan programs for subprime borrowers. In 2006 FHA's market share was a paltry 2%. Then the real estate market imploded, mauling the mortgage industry in the process into a bloody pulp. As a result banks were reluctant to make home loans unless they had a government insurance against possible defaults and all of a sudden FHA was back in the saddle, becoming for many the favorite go-to-guy. In the fourth quarter of 2008 FHA's market share had jumped to about 30%, as per Inside Mortgage Finance.
The agency has played a crucial role in securing financing for first-time buyers and doing refinances for homeowners during this mortgage market meltdown. But now dark clouds are moving in. Delinquent loan statistics are climbing ominously, reaching 7.5% at the end of February, when a year ago the number stood at 6.2%. The reserve fund backtracked to around 3% of its mortgage portfolio last year, when in the fiscal year of 2007 it was a healthy 6.4%. By law it has to be 2% or better.
These numbers speak for themselves. All is not well at FHA. At the core of the problem, it seems, is the directive that FHA lenders cannot employ risk-based pricing when underwriting loans. High-risk borrowers pay the same insurance premiums as do the low-risk ones. This was actually mandated by Congress last summer, a move that didn't make much sense then to many industry experts. High-risk anything should pay a premium for being that.
It really is rather bizarre that while the country is struggling mightily with mortgage defaults and everyone ought to know by now that they were mainly caused by lax lending standards, Congress keeps on promoting the same tolerant practices. Doing that right in the middle of this unusual challenge. As if they had learned nothing from the grave experience still roiling around them.
FHA will likely soon need a government bailout to stay in business. But for how long are its services needed is anyone's guess. Once the mortgage industry recovers and begins offering subprime loans again, which is a predictable possibility, it could well be shown a path to the previous obscurity.