Sunday, September 6, 2009
Will FHA Problems Be the Next Shoe to Drop in Ongoing Real Estate Crisis
By: Don Sieb HomeSeeker Center Think we're out of the woods in the massive real estate meltdown of the last couple of years? The next big crisis might affect the Federal Housing Administration (FHA), which has grown massively to fill the gap left by the collapse of subprime mortgage lending. The FHA is a big reason that home prices haven't fallen even further. The FHA's aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2 percent in 2005 to 23 percent today. The FHA is an even larger percentage of the new home mortgage industry, with nearly 25 percent market share, according to HUD. One wonders if FHA officials will be under pressure to continue tightening their lending policies, which currently allow 96.5% mortgages to people with 600 FICO scores. Already, FHA has contracted its own standards to require a 10% down payment for those with credit scores below 500." Claims against the insurance fund have climbed, with roughly 7% of all FHA-insured loans now delinquent. Without a strong and active FHA, millions of potential home buyers lose access to mortgage credit. While the FHA is self-funded, it carries the full faith and credit guarantee of the U.S. government. Since taxpayers will be on the hook for credit losses, we suspect that a number of elected officials will call for the FHA to reduce risk. At the very least, expect even tighter credit to have a serious impact on home sales. Watch the growing controversy regarding the FHA very carefully. The decisions made to allow the FHA to continue lending will have a huge impact on the housing market, particularly when so few entry-level buyers have a substantial down payment.