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Friday, February 18, 2011

Weaning off FHA

In 2005 & 2006 at the height of the housing bubble, less than 2% of mortgages were insured by the Federal Housing Administration (FHA). In 2010 FHA accounted for 38% of all new mortgages. As the private market for home loans collapsed in 2007 & 2008, FHA has stepped up to take a larger and more important role in housing.
But the desire to have the government less involved in the mortgage market has FHA pushing back. Last year there was a tightening of credit standards, as well as an increase in the premium that borrowers must pay to have their loan insured by the FHA (FHA insurance pays a claim to the lender in the event the borrower defaults).

In April of this year FHA will once again raise annual premiums by .25% of the loan amount (from .9% to 1.15%, a 28% increase). That equates to a $31.25 increase per month on a $150,000 mortgage.

In FHA's announcement explaining the reason for the increase, along with the obvious increase in revenue, they also expressed a desire for more home loans to be handled by the conforming market. Conventional loans with 5% and even 3% are available for borrowers with excellent credit scores, and less expensive mortgage insurance premiums. So they should be successful in reducing the number of borrowers that use FHA loan programs.

But if the highest quality borrowers (those with the highest scores) can get a better deal on conventional loans, and borrowers with lower scores are still stuck with FHA, then FHA will lose those higher quality borrowers which may hurt their overall quality and financial position.
Any insurance company (FHA, auto insurance, etc) needs customers will little or no chance of requiring a claim. Those customers going forward will likely choose conventional mortgage products with less expensive premiums.