FHA becomes tangled in its own safety net

The conventional lending system wants more skin in the mortgage game. We all get that. But should it be an arm and a leg?

It’s driving FHA off the playing field.

Because of the risks now associated with home mortgages, the Federal Housing Administration has become our go-to guy for loans. That’s because all FHA loans are insured by the federal government against default. Since the mortgage meltdown and the resulting stringent lending guidelines, more borrowers have taken the less onerous road offered by FHA requirements.

The problem is that road has become jam-packed with people who were never supposed to be on it. FHA was founded to make loans to a select number of people based on need and income. It funded 3 percent of all mortgages in 2006, and today funds more than 40 percent. More loans mean more delinquencies, and the Department of Housing and Urban Development – the agency that oversees FHA – now has its capital reserve ratio below the level Congress mandates.

FHA should return to its role of helping a select few, not the general population. It was founded on those principles. However, the housing industry should spend more time trying to mend the secondary markets and making nongovernment loans easier to get than chastising HUD for not watching its cookie jar. The agency got raided by a bunch of people not invited to the party, but HUD played the gracious host and is paying the tab for “conforming” lenders who fell by the wayside.

In a recent report, the George Washington University’s Center for Real Estate and Urban Analysis found that “in the wake of significant declines in home prices, we believe FHA could reduce its loan limits by approximately 50 percent and still almost entirely satisfy its target market. That would reduce its current large market share, which is difficult for FHA to manage.”

How could it expect to manage a growth curb that jumped from a 6 percent market share to 40 percent? In 2006, conventional money was so easy to get that borrowers didn’t need FHA, so 6 percent is not a good example. In 1999, FHA had 13 percent of all loans, which is about the load it was expected to bear.

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 One 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.

The agency first introduced and stood by the country’s most popular reverse mortgage product and the purchase-rehabilitation package known as the FHA 203K loan.

All of these programs are targeted for particular customers. That’s why the authors of the George Washington University study suggest the FHA market share should return to 10 to 15 percent by reducing the amounts on FHA loans. While exceptions could be made for cash-strapped seniors and reverse mortgages, wealthy borrowers were never on the FHA landscape.

Reducing the FHA loan ceilings just might push the conforming market to get its act together.