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FHA loans soar in wake of subprime crash
By Molly Parker
Staff Writer
On Halloween, the Federal Reserve cut the interest rate for the second time in two months, hoping to shield the rest of the economy from the housing market’s ills.
The day before, Stan O’Neal was toppled from the head of Merrill Lynch, one of the nation’s foremost financial brokerage firms, after the company posted $8 billion in subprime losses.
It’s not the best of times for people looking to buy a house with less-than-stellar credit scores. Forget trying to land an 80-20 loan, one often given by banks when you have little or no money to put down, or attempting to buy a house based on income you can’t prove.
The subprime market is all but locked up. But even as adjustable-rate mortgages reset and lending standards tighten, there may still be a place for distraught homeowners to turn, as well as people looking to buy, even if they didn’t pay their credit card bills on time, every
time.
The no-frills Federal Housing Authority, born out of Franklin D. Roosevelt’s 1934 New Deal policy, appears charged for a comeback.
“There’s a vacuum in the low end of the market and for people with blemished credit,” said Walter Molony, spokesman for the National Association of Realtors, which has focused its lobbying efforts on strengthening FHA-backed loans to get more people into homes. “There is movement to beef up the FHA and make it more useful.”
FHA, now an arm of the U.S. Department of Housing and Urban Development, issued about 17% of loans at the turn of the century, but its market share plunged to nearly 3% last year as it was brushed aside by the subprime market of fast and easy money.
The market share for the government-backed loan program is expected to steadily climb as the subprime market crumbles. The number of people refinancing from private-market loans into FHA loans has tripled since the start of early 2006, HUD Secretary Alphonso Jackson reported in late August when he and President Bush introduced a new FHASecure program aimed at homeowners who went into default as a direct result of their adjustable-rate
mortgages resetting.
“Basically it’s FHA insurance. When someone gets an FHASecure loan, if the person defaults, the insurance will pay off the mortgage,” said Jim Chaplin, HUD’s field office director for South Carolina.
However, the financially distraught might not be the only people considering FHA loans. There is a bipartisan effort in Congress to open up the program to more people by requiring smaller down payments, implementing a risk-based pricing structure and increasing the loan size one can secure through the program, particularly in expensive markets.
The FHA loan cap uses a HUD-based formula that takes into account median incomes and housing prices for specific areas. Currently that amount is $254,000 for the Charleston market, but the legislation could boost that to $417,000, said Jay Byars, the principal owner of Good Faith Mortgage in Charleston, a company that specializes in FHA loans.
Many mortgage companies avoid FHA loans because obtaining the proper licensing for the program can be both expensive and time-consuming, Byars said, but many more companies may be willing to spend the money and time needed as alternatives vanish.
“We’re one of the biggest FHA guys around and we’re not very big,” he said.
The number of people who could get approved this year for a home loan is 30% lower than last year, he said, so opening up the FHA program to more people could have a huge impact not only for consumers but also for the economy.
Over the years, the FHA has proven to be a trusty source for loans, though some of its customers have been thrown into foreclosure as well. In the second quarter of the year, subprime adjustable rate mortgage loans accounted for 8% of foreclosures, while FHA loans made 2% of foreclosures, according to data from the Mortgage Bankers Association.
Comparatively, prime mortgages accounted for less than half a percent of foreclosures.
“It doesn’t require perfect credit,” Byars said. “You can’t have terrible credit, but if it’s not pristine, you can still buy a home. “
Molly Parker is a staff writer for the Business Journal. E-mail her directly at mparker@setcommedia.com.
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