This article is a response to Rhonda Porter, a Loan Officer and Blogger from Seattle, in her Friday post about the House of Representative FHA Reform Bill. You can find her original article here.
Great post and some very timely consumer information! We couldn’t agree with your assessment of the situation more – the first sentence of the HUD program mission statement – “HUD’s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all.” – says it perfectly – FHA Loans exist to make housing loans available to consumers with more limited resources. This increase in insurance that passed, which raises the annual mortgage insurance premium from 0.5%-0.55% to a maximum of 1.55% (your article says that they will start at 0.9%) plainly makes these loans less attractive to the consumers whom they are meant to serve.
One additional issue that is being considered in this overhaul of the FHA Home Loan program is raising the minimum down payment from 3.5% to 5% – a change of $4500 on that $300k loan that you based your numbers off of – I don’t know how things are in Seattle, but down here in Portland, most people don’t have that just laying around. The good news is that it sounds like, although the possibility is still out there, that this increase will not take place because they have already raised the Mortgage Insurance Premium.
The biggest driving factor in this overhaul is the fact that the FHA program is critically under-capitalized. Several banks that fell at the peak of the crisis were considered well capitalized (at or above 10%). In 2009, the Capitalization Ratio for the FHA Program was calculated at 0.53%. Ouch ! – the required capitalization for this program is 2%. So, not only are they sitting at barely 25% of their own requirements (in terms of capital) but they are sitting at 1/10th or 1/20th the capitalization of many of the failed banks of the last few years.
I pulled the numbers, here’s what their capitalization situation actually looks like.
We all want/need the FHA program (instituted by the New Deal after the Great Depression) to stick around. The problem is this; FHA is trying to handle a landslide of new loans with the same infrastructure and capital that was adequate 5 years ago. In 2005, FHA (or HUD) insured 43,000 loans. In 2006, they insured 76,000 loans. In 2010 they are expected to insure 1.9 Million Loans. So, in the past 4 years they have increased the amount of endorsed loans 25 times over. It has taken them less than 4 years to NEARLY DOUBLE the total number of single-family-insured loans in their portfolio, from 3.8 million in December 2006 to 6.2 Million as of April 2010.
Regulators are afraid that if we see another round of defaults in the coming year(s), that HUD won’t be able to financially handle it. That’s why they voted to increase the MI Premium by such a large factor. On the other hand, we’ve been hearing that the defect rate has come down drastically since 2009, primarily because of the tighter lending guidelines from investors, banks, and the like. Across the board, loan officers, banks, and investors are becoming much more focused on quality loan files, responsible underwriting, and proper packaging of loans on the secondary market. Once again, our regulators are attempting to legislate something that the markets have already taken care of (like no-income loans).
FHA is an awesome program and has helped countless borrowers over the years. It may have a few leaks and rusty parts, and instead of fixing the engine, legislators are under the car with a roll of duct tape, trying to cover up the leaks. What will be interesting, and awful, is to see what happens if a government mortgage insurer goes belly up. Who is going to step in to bail out the FHA? My short-list of white knights? Germany, China and Google. Maybe we can sell them on Ebay or Craigs List? China already owns most of our mortgage debt anyway, we might as well sell them the whole thing.
So, if you want to make a quick buck – go register googlefha.com or buy fha.de/fha.cn today, just in case.
Until that point in time, FHA Loans are still a great option for first-time home buyers; the preferential interest rate usually makes the mortgage insurance payment well worth it.
From her website – “Rhonda Porter originates mortgages on homes located in Washington state. Rhonda is an NMLS Licensed Mortgage Originator at Mortgage Master Service Corporation. MLO-121324.”
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Geoffrey Boyd – Prime Lending – Clackamas, OR – NMLS ID# 184665