FHA Loans May Revise Guidelines

This rise in popularity of FHA loans has come about only within the last 3 years. As a result, Time Magazine tells us, the FHA’s current reserve funds have fallen to a mere $3.6 billion, even though its portfolio of loans has risen to $685 billion.

This disparity in numbers means that the reserves of the FHA, which are supposed to stand at a 2% ratio, have dropped below that designated bottom. Today, the FHA reserves are at .53%. As a result, according to a spokesperson, the FHA is considering a number of changes to the current loan program.

One of those changes may include an increase in the MIP (monthly insurance premium). The other change, which is even more controversial, is raising the minimum payment from 3 ½% to 5% or more.

A small group of FHA policy critics have suggested that the minimum down payment should be raised to 10%. Should this occur, it would defeat the main purpose of the FHA, which was to help poor people to purchase homes. As my fellow realtors would likely attest, such a change in rates would effectively eliminate at least 80% of today’s home buyers. Fortunately, this dramatic rate rise is not a populist view.

If the economic recovery suddenly reveres its direction, the FHA may need an infusion of cash from the Federal Government. This is a more likely scenario than a drastic increase in interest rates. The Independent suggests that up to $1.6 billion may be needed by 2011.

A looming problem is that FHA loans from 2006 and 2007, which were often backed by down payments made by sellers, rather than the buyers, are more than 2x as likely to default as those where the buyer is fully responsible.

An additional worry is the downward trend in investors buying up mortgage backed securities. In June of this year, investors purchased $260 billion of them. However, as of September, that number had moved down to $132 billion. If that rate of drop continues, there will be a deficiency in the market at around the same time the $8,000 mortgage tax credit expires at the end of April.

Despite this gloomy scenario, the FHA still has $31 billion in overall reserves, according to CNNMoney.com, and Shaun Donovan, Housing Secretary, says the FHA would cover all claims. After all, it is backed by the U.S. Government; and that Government support is precisely what is needed to keep the housing market in motion until the economy gets back on its feet again.

Written by Marc Jablon, Realty Associates
marcjablon@yahoo.com / 561 / 213 – 6139
www.MarcJablonHomes.com