Loan Modification

Could FHA market share stall in 2011?

By Peter G. Miller

For a growing number of borrowers, FHA loans are the key to financing and refinancing real estate.

The National Association of Realtors reports in its 2010 study of buyers and sellers that “homeowners continued to make sacrifices in order to reap the benefits of
homeownership, giving up some luxury goods and some of their savings in
order to invest in a home purchase. While the mortgage market has been
tighter, the overwhelming majority of home buyers had little or no difficulty
obtaining mortgage financing. Of those obtaining a mortgage, a considerable
share (43 percent) turned to FHA loans that offered much smaller down
payments. Also, ninety-three percent of first home buyers and just under half
of repeat buyers took advantage of the home buyer tax credit, which offered
a credit of up to $8,000 on a home purchase.”

Notice the big number? That 43 percent?

The question that arises is whether the FHA will continue to so-completely dominate the market in 2011. The betting here is that FHA market share will decline — and that may be something good.

Changing Standards

With the passage last summer of the Dodd-Frank Wall Street Reform Act the mortgage game changed. In essence, virtually all mortgages now conform to FHA loan guidelines in the sense of requirements to fully document loans, verify employment and confirm income.

Not to be overlooked is something else in the Dodd-Frank legislation: Loan officers can no longer be paid on the basis of yield-spread premiums, compensation that largely arises from the sale of loans with above-market interest rates.

This has been a big problem for borrowers. As the Wall Street Journal has reported, 61 percent of all subprime borrowers actually qualified for better financing in 2006 and many could have gotten lower-cost FHA mortgages.

One result of these changes is that the loans being offered today have a higher level of quality than the “non-traditional” products of a few years ago, the loans most responsible for the mortgage meltdown.

A second result is that borrowers will gradually gain more confidence in conventional loan products — if the Dodd-Frank reforms remain in place.

In other words, the safe financial haven provided by FHA loans will be less necessary if better conventional loan products remain available. If that’s the case more competition will mean relatively lower market share for FHA loan products.

This is not in any way a slight of the FHA program. Indeed, if anything, it’s evidence that the FHA was right all along to stick with its tough underwriting standards. If imitation is the sincerest form of flattery, then the FHA should be flattered by changes in the mortgage market.

But even if FHA market share declines it will remain a huge part of the mortgage world. Why? People have memories. They know that during the past few years it was the FHA which insured mortgages with strong borrower protections.

Full post as published by FHA Mortgage Guide on January 19, 2011 (boomark / email).