Bad Credit Mortgage Swoon Sparks FHA Loan Revival

Lenders hit by the collapse of the subprime market are shuffling back to an old faithful: the FHA loan, or residential mortgages insured by the Federal Housing Administration.

While a number of lenders already make FHA loans, several others, including IndyMac and Bank of America, are starting to make a significant push into the realm of FHA home loans.

“Because underwriting has tightened so significantly, you’re going to see people turning back to FHA to get first-time buyers into homes,” says Kurt Pfotenhauer, the senior V.P. of government affairs for the Mortgage Bankers Association.

“We do think we will see some increase in FHA volumes in the coming year.”

The news comes as banks and other mortgage companies struggle to replace the outsize profits made in recent years by lending to home buyers with poor credit.

The so-called subprime, or bad credit mortgage loan, market, which covers those with the worst credit histories, has ground to a halt after a spike in defaults and delinquencies on recent home loans drove dozens of lenders out of business.

One of the biggest subprime issuers, New Century, filed for bankruptcy earlier this month.

Also affected has been the market for what’s known as Alt-A mortgage loans, those made to borrowers with better credit, but without full documentation.

IndyMac is among the lenders that has specialized in this market for no-doc loans and has seen its shares tank as investors worry about credit quality up and down the mortgage spectrum.

The Pasadena, Calif., company is the nation’s second-largest independent mortgage lender. It plans to promote the FHA loan products, among others, to offset a decline in loan origination volume from the tightening of its lending standards.

In August, Bank of America launched a “national government fulfillment center” in Jacksonville, Fla., to underwrite and fulfill FHA and other government-backed loans.

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