FHA mortgages have become increasing popular in recent years. Yesterday there was a report from the Federal Financial Institutions Examination Council (which I found via Housingwire) that found the Federal Housing Administration (FHA) insured 37 percent of all mortgages originated in 2009. In 2008 FHA insured 26 percent of mortgages and 7 percent in 2007. This is a huge increase in volume for FHA and is somewhat disconcerting when the FHA’s insurance fund is considered.
In case you were unaware, the FHA insures mortgages against default and is required by Congress to keep capital reserves equal to 2 percent of total liability exposure to default. As defaults on subprime (and prime) loans increased, the FHA’s reserves were depleted. Earlier this summer, the FHA insurance fund fell as low as .53 percent of total liability.
In response to the increase in FHA mortgages and the depletion of the insurance fund, legislation was passed that would allow the FHA to change its fee structure in order to shore up its finances. The new rules would allow the FHA to increase its mortgage premium from .55 percent (of the total value of the mortgage) to 1.5 percent. At the same time, upfront mortgage insurance premiums would decrease from 2.25 percent to 1 percent. There are also going to be increased credit score requirements for FHA mortgages.
On the one hand, FHA mortgages open homeownership to many people who do not have a lot of money for a down payment (FHA only requires a 3.5 percent down payment while traditional lenders require 20 percent or more). On the other hand, FHA lenders are especially susceptible to becoming underwater in the event of declining home values because they do not have as much skin in the game as other homeowners. This makes these loan more susceptible to default. I suspect that the FHA program was not designed to insure nearly 40 percent of the mortgage volume in the country, it exposes taxpayers to a lot of liability. What do you think? Let me know in the comments section below.
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