The Federal Housing Administration (FHA) is a government insured entity which was established back in 1934 in order to assist home buyers with small down payments, low interest rates, and long loan terms.
This mortgage insurance program helps protect lenders against their future losses should the homeowner later default on their loan payments. There have been close to 40 million FHA home loans made to date across the U.S. since the creation of FHA back in 1934.
As the ongoing Credit Crisis continues to worsen, a higher percentage of home buyers or people wishing to refinance their existing mortgage loan(s) have relied upon FHA to qualify for a new loan partly due to tightening lending standards for both conventional and jumbo (greater than $417,000 loan amounts) loans in recent years.
Approximately 25% of all mortgage loans originated today are now insured by FHA. In many high cost regions of the U.S., FHA loans may be as large as $729,750 (up to almost 97% loan to value (LTV)). In recent times, home sellers were allowed to credit their home buyers between 3% and 6% toward their recurring and non-recurring closing costs.
As I speak or meet with many Realtors and professional real estate investment advisors, I am hearing that FHA is really the driving force behind a high percentage of home sales (existing and new) due to the higher loan to value limits, lower rates, and lower FICO credit scores allowed for these same loan products.
As the options for stated income, lower FICO credit scores, and higher leveraged conforming and jumbo loans have been reduced in recent years, more people have become dependent upon the FHA loan product. In many regions of the U.S., FHA insured mortgage loans may represent over 50% of all new home sale mortgage loans now within new development subdivisions.
In Southern California for example, the highest percentage of home sales seem to be in the more affordable price regions ($100,000 to $400,000 price range) such as Riverside County, or in the lower end of the price spectrum in Los Angeles, Orange, and San Diego Counties.
In 2008, FHA insured loans represented close to $400 billion nationwide. Last year, approximately one (1) million homeowners were able to refinance out of their existing sub-prime or Alt-A short term fixed rate mortgage loans into longer term (30 year fixed) mortgage rates offered by FHA as well.
If more existing FHA borrowers continue to default on their existing mortgage loans nationwide, then the FHA's already dwindling insurance cash reserves may drop too low to cover any future mortgage losses.
As a result of concerns about the record high foreclosure rates, weakening bank balance sheets, and low cash reserves for FHA, there are potential changes being discussed in regard to FHA which may include these following points:
1.) Tightening the underwriting guidelines to qualify.
2.) Increase the FHA insurance premiums to the borrower.
3.) Increase the required down payment requirements.
4.) Increase the minimum FICO credit score required to qualify.
It may be easier to qualify for a purchase or refinance loan now rather than later in the year especially if long-term thirty (30) year fixed mortgage rates continue to rise due to the reduced demand for our 10 year Treasury Bonds (30 year fixed mortgage rates are tied to these bond yields) in recent times.
Regardless of the weakening financial markets and the U.S. economy, there continue to be options or solutions for many real estate situations if you know where to look these days. Sadly, the options now are much less than in recent years though.