As recently as 2007, anyone who could fog a mirror could get a home loan. Everything changed with the subprime mortgage meltdown, as underwriting guidelines for conventional loans went from extremely loose to extremely stringent, whereby only the most qualified applicants with verifiable income and high FICO scores were able to get home loans.
As conventional loans became less available, FHA loans -- those insured by the Federal Housing Administration -- have provided an important alternative for borrowers with low FICO scores or a small downpayment. Under FHA guidelines, buyers with FICO scores as low as 620 or a downpayment as low as 3.5% of the purchase price (with a seller credit of up to 6% allowable) are all eligible for home loans.
Not surprisingly, the percentage of buyers using FHA loans has risen from 6% in 2007 to 22% in 2009. But as the delinquency rate on FHA loans rises, some question whether FHA loans will lead to the next round of either a bubble or a bust market, as money is made available to buyers with less-than-average credit histories with little skin in the game.
Just as in the boom days, some buyers might be tempted by the "easy money" available through the FHA (some buying with no downpayment -- and a 2.5% credit towards the purchase price, coupled with an $8,000 federal homebuyer's credit). These buyers may simply be unable to meet their loan obligations -- and may be the next round of walk-aways if values do head south.
Some lawmakers, however, worry that the FHA may be doing its job too well -- enabling too many people with shaky finances to get loans, and in effect setting up a potential repeat of the housing bubble fueled in part by no-questions-asked subprime loans.The FHA is not giving away freebies, and buyers are "taxed" to get these loans. Mortgage insurance is required (about $46/month for each $100,000 of loan) and a fee of 1.75% of the loan amount is due at closing. And these loans have played a critical role in stabilizing the real estate market. But there is a risk that the FHA loan pool will be the next round of pain in the challenged real estate sector.
Recent numbers appear to underscore those concerns. The percentage of FHA loans that are delinquent or in foreclosure climbed to nearly 8% at the end of June, from about 5.5% in early 2006, according to the Mortgage Bankers Assn. And in the weeks ahead, its reserves for loan losses are projected to slip below federally mandated limits. [Los Angeles Times]
"It's not the least bit implausible to be concerned about the ever-deteriorating performance of the FHA portfolio," said UCLA finance professor Stuart Gabriel, director of the university's Ziman Center for Real Estate. "The jury is out as to whether the FHA is going to need a government infusion."