FHA loans come to rescue of home buyers

Insurer makes good mortgage rates available with small down payment
By LESLIE A. PAPPAS, The News Journal

Posted Sunday, February 17, 2008
For Monica Buchman, the FHA loan was a lifesaver.

The Magnolia resident was drowning in bills and wanted to refinance, but with home prices declining, her consolidated debt totaled almost as much as her home was worth. But the quick refinancings and easy credit of years past were drying up -- brokers were offering loans with rates of 10 percent or more, and Buchman knew she wouldn't be able to make it without a better rate.

She found finally found it in a 7.25 percent, 30-year fixed loan from Gilpin Mortgage, backed by the Federal Housing Administration.

"It gave me relief," said Buchman. The FHA loan "was exactly what I needed."

An ugly duckling just a few years ago, the humble FHA loan may turn out to be the swan of today's mortgage market.

With an increasing number of subprime borrowers heading toward default and banks shying away from 100 percent financing on all types of the mortgages, the old FHA loan is suddenly looking very attractive. The FHA insured 49 percent more loans in the four months ending Jan. 31 than in the same period a year earlier, U.S. Department of Housing and Urban Development data show.

FHA is likely to become even more popular in the coming months given a provision in the Bush administration stimulus package that temporarily hikes FHA loan limits until Dec. 31, 2008. Beyond that, pending FHA modernization legislation in Congress could raise the ceiling permanently and push FHA required down payments even lower.

"We have definitely seen a pickup" in FHA loans, said Ann G. Riley, president of Wilmington-based Gilpin Mortgage. "FHA has gone through a metamorphosis."

The Federal Housing Administration provides insurance on home loans made by FHA-approved lenders. The self-supporting government program, which has insured more than 34 million mortgages since it began in 1934, requires small down payments, and historically has been more flexible than conventional loans in calculating income and payment ratios. For years, people with blemished credit, low incomes, or scant money for a down payment turned to FHA loans.

But when housing prices soared in the early 2000s and eager lenders got creative with financing, new types of loans started eating into the FHA's turf.

"With the frothing of the real estate market and people wanting their loans and wanting them quick, FHA fell out of favor with both consumers and lenders," said John Mechem, spokesman for the Mortgage Bankers Association.

"Piggyback" loans allowed prime borrowers to buy bigger homes with virtually no money down. And a cornucopia of subprime mortgages with variable rates and loose requirements opened the market to borrowers who didn't want to bother with FHA's more prudent rules. The FHA's share of the market in Delaware dropped from 15 percent in 1998 to 6 percent by 2007.

"Subprime came in and people -- in retrospect, mistakenly -- thought they were better off going with a subprime loan because some of them were no down payment at all, and in some case no documentation," said Riley. "People said, 'I don't want to deal with the red tape.'"

FHA loans had long suffered from the stigma of being too difficult to get, especially given appraisal requirements that required sellers to fix broken window panes or uneven sidewalks before a sale could go through.

That changed in January 2006 after the FHA relaxed its appraisal requirements and brought them more in line with the industry.

"We changed our processes, streamlined our procedures, and we're seeing the fruits of that now," said Gerry Glavey, director of the processing and underwriting division of HUD's Philadelphia Homeownership Center, which oversees Delaware's FHA loans along with those of 15 other states in the Northeast.

It also didn't hurt that, as MBA's Mechem put it, "the volume of subprime lending has dropped off a cliff."

During the subprime boom, FHA market share bottomed to 3 percent nationwide, Glavey said. Today his division is so busy he's looking to hire eight people (see www.usajobs.gov under federal housing commissioner). In January alone, the Philadelphia division insured 22,000 loans, up from an average of 11,000 loans per month last year.

Glavey expects the demand will increase even more once the new ceilings for FHA loans kick in. The current ceilings for a single-family home in Delaware are $292,685 in New Castle County, $285,071 in Kent, and $247,000 in Sussex. HUD has 30 days to recalculate the ceilings, which will be based on 125 percent of median home prices instead of the current 95 percent. Glavey did not want to speculate on what the ceilings would be; Riley of Gilpin Mortgage anticipates the ceiling in New Castle County could reach $362,500 -- a 24 percent jump.

The increase will make a huge difference in high-cost areas like New York and California, where loan limits are currently stuck at $362,790 while home prices soar far beyond that.

The Bush administration stimulus plan will temporarily raise those limits in high-cost areas to 125 percent of the median home price, up to $729,750.

"We're really excited," said Shane Backer, a branch manager and senior loan officer at Robbins & Lloyd Mortgage in New York City, who anticipates the new ceiling will allow more New Yorkers to purchase and refinance via FHA. "People with low credit scores who can still qualify based on their income are perfect candidates for FHA," he said.

Even with the FHA's resurgence, consumers should still make sure they get the best mortgage rate possible, said Gerry Kelly, Delaware's deputy bank commissioner for consumer affairs. Not all lenders are FHA-approved, and scams still ensnare unwary borrowers.

"People can be taken advantage of, even when they get an FHA loan, with high fees and an interest rate that's higher than it has to be," said Kelly, who advises consumers to educate themselves and go to at least three lenders before making a decision.

"There's no penalty to your credit report if you shop around in a 30-day period," Kelly said. "You can do better if you shop around."