January 3, 2010 in Business

FHA steps up in time of need

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Every time HUD makes a change or looks at its financial stability, you hear howls about its function in housing. Should the government really be involved in homes and loans?

Some members of Congress would like to see the Federal Housing Administration taken out of the Department of Housing and Urban Development and put into the private sector.

For years, “government housing” options – specifically FHA loans – were perceived as being problematic and heavily wrapped in red tape. The favorite line for real estate salespersons became “Of course your FHA loan is screwed up. Can you spell HUD backwards?”

But guess what: HUD also steps up. HUD tried programs that the private sector wasn’t ready to digest. The agency first introduced and stood by the country’s most popular reverse mortgage product and a couple of its first cousins: low-down-payment first mortgages and the purchase-rehabilitation package known as the FHA 203(k) loan.

In 2009, when money was tight and jumbo loans became so difficult to find, FHA became the safety valve for many mortgage brokers. Some lenders report that FHA loans make up nearly 40 percent of their business, nearly double the volume of the past five years combined.

While the periodic dark side of the agency has surfaced over time (investigations of former secretaries and allegations that some programs were labeled “inept, detrimental and costly” by the Office of Inspector General) HUD and other government agencies are a critical part of the public housing landscape.

HUD believes if FHA went private, borrowers would be charged higher fees and interest rates than FHA charges, resulting in fewer home ownership options. In addition, the department points to a task force conclusion that the sale of FHA to private owners would not attract buyers offering a reasonable price.

FHA insures loans so that if the borrower defaults, the lender is guaranteed to receive the outstanding mortgage amount. For the past 75 years, an FHA loan has been the primary low down-payment option for home buyers.

The popularity of FHA loans dwindled in the past decade as the private market grew more sophisticated and efficient at creating and providing mortgage money. This year, lenders returned in droves to the security that FHA provides their borrowers.

While HUD is mostly known for its FHA low-down-payment home loans, FHA has a home- improvement loan program, too, and it has come in handy for folks who need cash and can’t get a home equity loan due to already high loan amounts or slumping home values. FHA Title 1 loans of up to $25,000 are available to owner occupants and investors who want to repair or improve their property. Up to $15,000 can be obtained regardless of home value. And if you need $5,000 or less, no security is necessary.

A prime traditional FHA target – first-time homebuyers – are pushing the housing ladder. Many of them are new to this country, and analysts believe that the immigrants hold the keys not only to the residential building industry but also to the economy. That’s because many newcomers pay cash, reducing the concerns of escalating consumer debt, except in big-ticket purchases like homes. Therefore, HUD is the critical player at both ends of the housing finance ladder – first-time loans and reverse mortgages.

In 2009, the agency showed it was the go-to player for all loans in between. It now has more than 5.2 million insured single-family mortgages and 13,000 insured multi-family projects in its portfolio.

Tom Kelly is a former real estate editor for the Seattle Times. His book “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore of Stewart International.

One comment on this story so far. Add yours!

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  Christa_Lawcock on January 04 at 2:42 p.m.

  While FHA has been a life-saver and opened doors for a lot of homeowners, whenever you have such a large entity, where they back 1 out of every 4 mortgages, you can run into problems, snags, and beaurocracy. It’s a great program, and it’s come a long way; but there is still a lot of red tape with many of their programs, and unfortunately, even though the FHA backs so many mortgages and takes the loss if a homeowner defaults, their fees oftentimes make it unattractive for homeowners and many lenders themselves push other programs.

  While it has spurred the market during this housing recession, I have to wonder how many homeowners truly understand that not all banks abide by the rules FHA sets down? For example, if a homeowner defaults and their loan is FHA-secured, in certain states, an anti-deficiency statute may require the lender to recoup the property only, and no additional promissory notes. Yet too often, I have seen banks “play dumb”, claiming that the loan—which FHA says is the underwriter on—is not FHA! Many homeowners won’t know where to go to check, and they end up unwittingly signing a promissory note for the deficiency. In the meantime, the bank processes their “loss”, and FHA (AKA Mr. and Mrs. Taxpayer) pays it. The banks, then, are getting paid twice: Once from FHA, and again from the original homeowner, WHILE ALSO KEEPING THEIR COLLATERAL (the home!).

  The banks can do this because FHA is so big, and so mired in beaurocracy, noone is checking! Billions are lost to fraud every year; because they are backed by the government, they aren’t likely to be shut down; and without some type of oversight, they have no reason to ensure their practices and policies are being adhered to.

  So many Americans were outraged by the bailout of AIG. FHA surpasses that.

  I’m not, by any means, calling for FHA to be shut down, and I want to reiterate that it offers, especially today, a way for homeowners to get a loan at an attractive rate. I am, however, extremely worried that this bank (and it is a bank, for all intents and purposes) is a bomb just waiting to go off.