FHA Loans to Assist with Subprime Mortgage Problems?

The National Association of Realtors has called on Congress to enact legislation that will allow the Federal Housing Administration to conform to today’s bad credit mortgage environment by offering safe alternatives to risky loans.

“Because FHA has not changed with the times, a growing number of home buyers are deciding to or are being forced to use one of several types of nontraditional mortgages,” said Joanne Poole, a Realtor and home mortgage broker-owner from Maryland.

She spoke on NAR’s behalf at a hearing before the U.S. Senate Appropriations Subcommittee on Transportation, Housing, and Urban Development.

If the FHA had an effective alternative to offer home buyers, “it’s not hard to imagine a lessening of those risky products, and therefore a lowering in the rising number of mortgage delinquencies,” Poole said.

NAR spoke out in favor of many proposed changes to FHA, including eliminating the statutory 3 percent minimum cash down payment, offering down payment flexibility; allowing the FHA to offer risk-based pricing; and increasing the loan limits an FHA loan.

The FHA was established in 1934 to provide consumers with an alternative during a lending crisis. Since then, the agency has insured more than 34 million properties. However, because FHA has not evolved, its market share has been dropping, Poole said: FHA loans accounted for about 12 percent of the market in the 1990s, compared with less than 3 percent today.

Poole also noted that FHA loans have a foreclosure rate lower than many of the riskier, nontraditional mortgage products, and the program has never needed a federal bailout.

“When formed, FHA was a pioneer of mortgage products, but today it has become like a lender of last resort,” Poole said.

History of Helping the Housing Market
The universal and consistent availability of FHA loan products is the principal hallmark of the program that has made mortgage insurance available during periods of prosperity or depression, Poole said.

For example, when the housing market was in turmoil during the 1980s, FHA continued to insure loans when others left the market. FHA also devised a special loan forbearance program after the Sept. 11, 2001 attacks for those who temporarily lost their jobs, and enacted a foreclosure moratorium after Hurricanes Katrina and Rita for borrowers who were unable to pay their mortgages on time.

“FHA has helped to stabilize housing markets when private mortgage insurance has been nonexistent or regional economies have faltered,” Poole said. “Now, more than ever, FHA needs to be strengthened to continue to be useful and available to borrowers. FHA is a leader in preventing foreclosures.”

SOURCE: Realtor Magazine