Loan Modification

FHA Loans: Critics Fear Lending Standards Still Too Lenient

By Karen Lawson

With FHA home loan delinquency rates rising and its mortgage insurance fund shrinking, critics question whether FHA guidelines need further tightening. Housing and mortgage industry officials cite the agency’s need for reducing its losses while maintaining its unique role in supporting US housing markets.

FHA Home Loans: Growing Market Share, Growing Risk

Since 2006, FHA mortgage loans have grown from about 4% of US market share to approximately 33% of US homebuyers. This rapid increase has created excessive exposure to potential losses:

• Many homebuyers depend on FHA for mortgage loans: As conventional lenders have raised credit score requirements and minimum down payments, moderate income and credit challenged borrowers rely on FHA for home loans and refinancing. When the sub-prime lending industry collapsed, FHA quickly became the only source of mortgage loans for many homebuyers and homeowners. Its unique role in providing home loans to borrowers with fewer assets and less credit puts the agency at increased risk.
• Too many mortgage loans, too fast: When sub prime loans became scarce, FHA experienced exponential growth in its market share, and was unable to monitor mortgage lenders for adherence to its lending requirements. some lenders played fast and loose with FHA guidelines, which resulted in increasing delinquency and foreclosure rates. FHA has cracked down on lenders and has publicized its suspension of several lenders and its plans for monitoring FHA approved lenders for compliance.
• Low mortgage rates: With mortgage rates remaining near 5%, more moderate income borrowers can qualify for home loans through FHA programs.
• Federal homebuyer tax credit: This program provides incentives for potential buyers to buy homes. Along with low mortgage rates, and accessible FHA home loans, the tax credit is encouraging many first time and moderate income buyers to buy homes using FHA programs.
• FHA refinancing and declining home values: Homeowners facing losses of home value may have no choice but turning to FHA for refinancing to current low mortgage rates; FHA refinance options allow for higher loan to value ratios and can accommodate refinance loans that wouldn’t e approved by conventional mortgage lenders.

Pull the Rug out from Under US Housing Markets? No Way

While FHA must carefully craft its risk management strategies for minimizing losses, it cannot revise its lending guidelines to a point where many home loan borrowers can no longer qualify for FHA loans. If buyers and homeowners depending on FHA mortgages become ineligible for purchase and refinance mortgage loans, home prices could further decline and delinquencies and foreclosures may well increase.

Full post as published by FHA Mortgage Guide on February 22, 2010 (boomark / email).