FHA has made a remarkable comeback in the last several months. Many of the creative home loan products that fueled the recent boom, especially those under the banners subprime and Alt-A, are rapidly being swept into the dustbin. FHA has stepped into the vacuum, offering low down payment options to borrowers who are itching to buy a property while prices are still as attractive as they are. FHA's market share in 2006 was about 2%, rather trivial number, and now it's around 23% and is expected to climb to 30% by the year's end, according to Inside Mortgage Finance.
But FHA is facing challenges, too, as it's seeking to restore its place in the huge mortgage market. The near future at least, and probably longer than that, is going to be dominated by an unhealthy amount of foreclosures. FHA, as an insurer that home loans will be paid, is projecting that it'll have to pay substantial sums of money to mortgage lenders and investors in the coming years as loans keep going bad.
To cope with that prospect, the agency just announced that it'll raise the upfront premium for most borrowers from 1.5% to 1.75%, starting October 1, 2008. It comes to $3,500 for a $200,000 mortgage and $5,250 for a $300,000 loan. That is a substantial sum of money for many buyers and refinance candidates. The current annual premium is scheduled to stay at 0.50% to 0.55% of the existing loan balance.
FHA is forced to do this to shore up its reserves so it can meet the upcoming payout demands. By doing it, though, it'll also risk pricing itself out of reach for many borrowers. Its role as the main player to help out struggling homeowners to find affordable financing could now be jeopardized. There is already talk in Washington that FHA may need to ask Congress for money in case current mortgage default pace persists for several more months. Either that, or push the premiums even higher and possibly watch its market share start dwindling again.
The agency has to walk a fine line now and keep a keen eye on the market. It's possible that its sudden rise to prominence could stall.