FHA loans gain popularity after subprime fiasco

The now-reviled subprime mortgage, blamed for sparking the current financial crisis, is all but dead.

But people with little money for a down payment and even blemished credit are still buying homes.

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KIMBERLY WHITE/Bloomberg

The rate of FHA loans entering the foreclosure process is reportedly 0.95 percent. It’s 2.07 percent for subprime loans.

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How? Many are turning to the government for help — namely, the Federal Housing Administration.

As banks and other lenders tighten standards in the wake of the subprime mortgage crisis, requiring sizable down payments and ever-higher credit scores, FHA-insured loans are looking like a good alternative to many buyers.

The FHA requires a 3 percent down payment, compared with 20 percent for some conventional mortgages. The FHA also doesn’t require a minimum credit score, though some lenders have minimum standards in place.

On top of that, the government has substantially increased the amount of money that can be borrowed through FHA loans and — for the first time — is allowing homeowners who are behind on their monthly payments to refinance through the FHA.

As a result, the popularity of government-backed loans is soaring.

Nationally, the FHA is insuring more than $24 billion in mortgages a month, up from about $6 billion a month a year ago, a figure that includes purchases and refinances. In metro Atlanta, the number of FHA loans is on pace to more than double this year.

“All of a sudden, FHA has come back in a big way and is a much bigger piece of the pie,” said Walter Moody, a Macon broker who is president of the Georgia Association of Mortgage Brokers.

Jan Wagner, president of Canton Street Mortgage in Roswell, said her company began handling FHA loans only this year. But now, nearly one in three of her company’s mortgages is backed by the FHA.

“You have to have FHA to survive,” she said.

But some worry about the surge in the FHA’s loan volume. It’s been only a couple of weeks since the government bailed out Fannie Mae and Freddie Mac, the mortgage giants that sank under the weight of too many bad loans.

“It’s a huge risk that the government is taking on,” said Scott Evans, owner of Marietta-based Family Mortgage of Georgia. “It’s real scary to me. As a taxpayer, I’m concerned about it.”

FHA officials said programs are in place to minimize risk, such as borrower counseling services and a lender oversight process.

“We have consistent guidelines in that we do require borrowers to document income and their ability to pay,” said Charles Gardner, director of the FHA’s Atlanta homeownership center.

According to the Mortgage Bankers Association’s most recent national delinquency survey, the rate of FHA loans entering the foreclosure process stood at 0.95 percent. That’s higher than the 0.34 percent rate for prime loans, but much lower than the 2.07 percent rate for subprime loans.

The FHA was created in the ashes of the Great Depression to boost home buying, but over the years its influence waned. Fannie Mae and Freddie Mac took over market share in part by backing all sorts of risky products such as no-money-down, interest-only loans that required no proof of income.

In contrast, the FHA, an arm of the U.S. Department of Housing and Development, requires borrowers to jump through at least some hoops, such as verifying income and submitting income tax records.

Loan amounts are capped at different amounts, depending on the region. In metro Atlanta, the limit was raised in March to $346,250 — up from $252,890.

The FHA does not directly make or hold any loans, but instead offers insurance to lending institutions. If a mortgage goes into default, the FHA will take it off the lender’s hands.

To help cover the cost of this protection, the FHA charges borrowers a flat upfront fee and a smaller monthly fee. In July, the FHA began charging different upfront fees based on an analysis of the borrower’s risk — 1.25 percent for lower-risk borrowers and up to 2.25 percent for riskier borrowers.

Some changes are coming on Oct. 1 that could make it easier for some borrowers to take out an FHA loan but harder for others.

Sellers will no longer be able to cover buyers’ down payments by teaming up with nonprofit assistance groups, a provision that has helped many people without much cash on hand buy homes.

The risk-based mortgage insurance program will be halted for at least a year, replaced by a flat 1.75 percent fee. That’s good news for riskier borrowers, but it will mean slightly higher payments for people with better credit.

FHA-backed mortgages in metro Atlanta

*From Oct. 1 to Sept. 30, except for 2008 figures which run through August.

Source: Federal Housing Administration