Article by Jeannette Bernay
FHA’s mortgage insurance program comes at a cost during challenging economic times. In 2009, FHA’s financial cushion fell below where it’s required to be. However, FHA has never required a federal bailout in its 75-year history. And its independent auditor predicts FHA won’t lose money because it had $32 billion in reserves in 2010 to pay its mortgage insurance claims.
To shore up its reserves, FHA decreased the insurance premium home buyers pay at closing to 1% and increased the annual premium from .55% to .85% or .90% in 2010.
FHA critics say
Critics want FHA out of the mortgage insurance business. They say:
- Loan limits are too high. FHA’s mission is to help low- and moderate-income households become home owners. The current loan limits are $729,750 in high-cost areas.
- FHA takes on too much risk. They worry FHA will need a government bailout.
- FHA borrowers fail too often. FHA borrowers whose loans were insured before 2007 are failing to make monthly payments and the current lack of other mortgage options has more poor-quality borrowers flocking to FHA.
- The federal government doesn’t belong in the market. In the aftermath of the mortgage crisis, FHA opponents think the federal government should reduce its support of home ownership and let the private sector provide mortgage insurance.
FHA supporters say
FHA has been a major source of mortgage insurance at a time when the private sector almost pulled out of the market, supporters say. There’s more proof that FHA won’t need a bailout.
- FHA has weathered the financial storm. FHA is rebuilding reserves and has enough cash set aside to cover future losses despite the current historic decline in the housing sector.
- Tougher rules mean fewer foreclosures. New FHA lending rules make it tougher for borrowers to qualify, which should reduce the number of bad loans going forward so the reserves are built back up. You now need a credit score of at least 580 if you’re buying a home with a 3.5% downpayment—or a score of at least 500 to buy with 10% down using an FHA loan.
- “No down” is long gone. A significant portion of the loans that went bad for FHA were from seller-funded downpayment assistance programs. FHA borrowers can’t use those programs any more.
- Loan limits help those in areas with high home prices. Any reduction in the loan limits would dry up the flow of mortgages in areas with high home prices, which could slow or halt the housing recovery.
Helping the housing recovery
Before FHA was created in 1934, there was no such thing as a 30-year, fully amortizing home loan. Home owners who couldn’t refinance after the first five years of the loan (which was almost impossible after the depression hit) had to pay off their loan.
Back then, home buyers needed a 20% downpayment to buy a home. Saving that much money was a great barrier to home ownership. Today’s FHA allows borrowers with good credit to buy a home with as little as 3.5% down and to refinance easily. It’s a popular program in a tough mortgage market.
In 2009, FHA insured one-third of the home purchase mortgage market, almost 1 million transactions. First-time home buyers bought 80% of those homes.
“In this economy,” according to Nicolas P. Retsinas, director of Harvard University’s Joint Center for Housing Studies, “it’s difficult for families to save due to low wages, and it’s difficult to have a pristine credit rating. Without FHA, they would have no place to go to get home financing.”
FHA is also a much-needed source of funds for current home owners who want to refinance. The more than 800,000 borrowers who refinanced with FHA in 2009 saved an average of $130 a month, for an estimated total annual savings of $1.3 billion, FHA data shows.
How to support FHA
FHA frequently appears on the Congressional agenda. If you want to see it continue to help Americans affordably and safely purchase and refinance homes, contact your U.S. Representatives and Senators and let them know you support FHA.
Jeannette Bernay has been in the real estate industry for over two decades. She lives in western Washington State on an 8-acre lot shared with her two horses, two dogs, and three cats.