FHA Loan Volume Risking Reserves
Bloomberg published an article recently that considered the impact of FHA loans. FHA first time homebuying remains popular with the low FHA interest rates. FHA home loans re guaranteed by the Federal Housing Administration, the U.S.-owned mortgage insurer, may be involved in more home-purchase transactions than borrowing financed by Fannie Mae and Freddie Mac. FHA mortgage lending last quarter may have topped the combined volume of government-supported Fannie Mae and Freddie Mac in a home-lending market that’s still a “government-financed market,” David Stevens, the agency’s head, said today at a conference in New York, citing research by consultant Potomac Partners. “This is a market purely on life support, sustained by the federal government,” he said at the Mortgage Bankers Association conference. “Having FHA do this much volume is a sign of a very sick system.” The FHA mortgage loan is insured by the government so when loan defaults sky-rocket, there are reasons to worry. With down payments as low as 3.5%, insured $52.5 billion of home-purchase mortgages in the first quarter, compared with $46 billion of purchases of the debt by Fannie Mae and Freddie Mac, according to data compiled by Washington-based Potomac Partners. The FHA and Fannie Mae and Freddie Mac, which regulators seized in 2008, have been financing more than 90 percent of U.S. home lending after a retreat by banks and the collapse of the market for mortgage bonds without government-backed guarantees.
FHA has been taking steps to shore up its program after being left with “terrible portfolios” from 2007 and 2008, Stevens said. Freddie Mac has mainly “eliminated” its financing of certain “esoteric products,” Donald J. Bisenius, executive vice president of the McLean, Virginia-based company’s single- family credit-guarantee business, referring to debt such as low- documentation lending or so-called option adjustable-rate mortgages with growing balances. The company’s “parameters around” 30-year fixed-rate loans still allow for relatively low down payments and credit scores and high debt-to-income ratios, he said. “It’s not obvious to me that the credit box has shrunk as much as the numbers might suggest,” Bisenius said. Article was written for Bloomberg by Jody Shenn and John Gittelsohn.
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