FHA Home Loan Lending Future Called into Question

The Federal Housing Authority’s lending program, once considered the premier avenue for financing a home, is facing an uncertain future.

Ben Johnson, director of the Single Family Ownership Center with the U.S. Department of Housing and Urban Development, said FHA loans now account for less than 5 percent of home loans written each year.

“Quite frankly, we’re at a crossroads to keep FHA a viable player,” Johnson told members of the Colorado Association of Mortgage Brokers Tuesday.

Last year, the House of Representatives passed legislation that would streamline the procedures for obtaining FHA loans and loosen restrictions on qualified lenders. The Senate, however, failed to deliberate the FHA Modernization Act of 2006 before it adjourned last year.

“We’re looking to reintroduce that bill,” Johnson said.

Though FHA loans are 100 percent insured and often provide the best interest rates, especially for first-time home buyers, many lenders stopped writing FHA loans in the late 1980s and early 1990s, Johnson said. The reasoning?

“The competition was coming up with more creative products.”

But Jason Berman, outgoing president of the Colorado Association of Mortgage Brokers, said lenders have been discouraged from offering FHA loans by requiring lengthy documentation and expensive financial audits.

FHA audits, said Berman, can cost lenders up to $45,000 a year.

“Many originators can’t do it. They’re mom-and-pop businesses,” Berman said.

Government regulations also require an FHA home loan lender to operate from a formal place a business, which also is dampening enthusiasm for writing FHA loans.

“The trend in the mortgage industry is for brokers to work out of their home,” Berman said.

Johnson said many criticisms of the FHA program would be laid to rest if Congress would pass legislation that would allow increased electronic processing, quicker turnaround of appraisals, revised mortgage refinancing guidelines and the elimination of closing cost restrictions and some documentation.

Home buyers would also be able to get 95 percent loan-to-value financing. The current maximum is 85 percent.

Johnson urged lenders to take a more active role in reforming the FHA loan program and saving it.

“The FHA has helped 34 million Americans become homeowners at no expense to the taxpayer,” Johnson said. “[It’s] self-insured and self-funded. It makes good economic sense.”