Tight credit makes FHA a bigger player

The Federal Housing Administration is back on the block.

Largely overlooked when mortgage lenders had a product for any borrower who could draw breath, the FHA has re-emerged as an important player in the real estate market.

Although the agency does not make loans, it does guarantee them. With foreclosures and delinquencies increasing, lenders and borrowers have turned to an old backstop.

FHA’s importance has also been magnified by decisions by Washington Mutual and other banks to no longer wholesale loans, which gives brokers fewer places to take their loans.

“The consumer doesn’t have a lot of options right now,” said Glen Campbell, president of the Eastern Washington chapter of the Association of Mortgage Brokers.

Campbell, also a principal at Empire Home Loans, said wary lenders have raised the bar so high on conventional loans that far fewer qualify, especially first-time buyers. FHA-backed loans are an attractive alternative because the down payment can be as low as 3 percent, he said.

And, until a recent decision by a U.S. District Court in California is overturned, home sellers or other private parties can make that 3 percent payment. Some government or charitable programs can also help, but that money is fast disappearing.

Campbell said qualifying buyers for FHA financing means more work for brokers and more out-of-pocket costs for borrowers because FHA does not allow all fees to be rolled into the loan.

Nevertheless, the path to the FHA door has become crowded.

Spokesman Leland Jones said the agency guaranteed 1,702 loans in Eastern Washington through the first six months of the 2008 federal fiscal year, which started Oct. 1. That’s almost three-quarters of the 2,346 loans guaranteed in all of 2007, he said, and demand is accelerating.

Lenders must apply for a case number that starts the process of getting an FHA guarantee, which takes three months or longer. The FHA received 350 such applications in October, Jones said. Last month, the total was 736.

The trend will take FHA back to the kind of numbers registered before easy money from other sources took the agency out of the game for a while, he said. In 2003, the agency backed 5,843 loans in Eastern Washington.

Jones said the economic stimulus package enacted in February lifted loan limits, which will make guarantees available to more borrowers. For Spokane, the limit on a single-family home jumped to $271,050, up from $202,350 previously.

And, earlier this month, the Bush administration announced changes that will allow an estimated 100,000 homeowners who are behind on their mortgage payments to access FHA loans if they can come up with a down payment. How much depends on how far in arrears they are.

Borrowers with adjustable-rate mortgages who are two months behind can qualify for a fixed-rate FHA loan if they can come up with a down payment equal to 3 percent of their home’s current market value. Three months behind, and the required down goes to 10 percent.

Congress is debating legislation that would expand FHA availability still further.

Deb Bortner, director of consumer services for the Washington Department of Financial Institutions, said she expects mortgage credit to remain tight.

More adjustable-rate mortgages will reset over the next two years, she said, putting more stress on borrowers and their lenders. Washington has been fortunate because housing prices have held up, she said. Foreclosure rates are a fraction of those for the nation as a whole.

“We’re still really lucky here,” Bortner said.

In Eastern Washington anyway, FHA has not had to absorb many foreclosures. Jones said the agency has absorbed only 75 since Oct. 1 in a portfolio that includes 17,050 loans.

“In a market in search of stability, a good place to go is FHA,” he said.