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FHA Home Loans May be the Housing Market's Savior

FHA Home Loans May be the Housing Markets Savior
The housing market and the financial market were the two industries most devastated by the housing bubble, financial crisis, and subsequent recession.

Since the recession began, millions of homeowners have been foreclosed upon. The housing market shrank as jobs and the income necessary to pay for homes evaporated. Consequently demand for all new homes vanished. Banks rose to fully own millions of properties across the country—homes that sat empty, free of the families that once occupied them.

While the housing market fought for its life and made it through the “official” recession, it is presently nothing more than a shattered husk of its former glory. However, where the private sector failed against the rampaging recession, it seems the government may succeed.

The War Chest

The Federal Housing Administration (FHA), the government agency tasked with insuring home loans (known as FHA home loans), is poised to save—or at least attempt to aid—the ailing housing market.

Despite estimates of a shortfall, the FHA is predicted to end the fiscal year with roughly $3 billion in reserves thanks to a rise in loan volume and premium increases.

This massive reserve cache is a welcome relief compared to February, when the FHA was going to make a history-making request for a $688 million taxpayer subsidy. As luck—and legal proceedings—would have it, the FHA did not require the massive taxpayer subsidy once it received roughly $1 billion from a legal settlement over flawed foreclosure protocols.

With such a veritable war chest of money at their disposal, the FHA can continue to insure FHA home loans for borrowers who now commonly have less-than-favorable-credit—at least compared to the golden age of the housing market prior to the bubble burst. Combined with low mortgage rates, this situation presents a ripe opportunity for advantageous borrowers to become homeowners.

From Zero to Hero

The FHA had been in dire straits due to soaring defaults on FHA home loans when the housing bubble burst and the recession smashed the economy. The FHA currently insures an estimated 7.1 million FHA home loans that have outstanding balances in excess of $1 trillion. This is a threefold rise compared to five years ago.

Since April of this year, FHA home loan volume and premium revenue have skyrocketed once the FHA raised insurance premiums for new single-family residences from 1 percent of a loan’s amount to 1.75 percent. Hoping to encourage refinancing of loans originated before June 2009, the FHA made massive cuts to up-front premiums in its streamlined refinance program, dropping them from 1 percent to 0.01 percent. Annual fees were also cut from 1.15 percent to 0.55 percent.

These massive rises in revenue numbers have shown that homeowners are once again paying for mortgages at the beginning of their homeownership. The FHA has also shown it is actively lowering rates and cutting fees in order to court more borrowers. These same borrowers clearly have the additional funds to purchase a home—a possible hallmark of a recovering economy.

While private uninsured lending may be struggling, insured FHA home lending is certainly not. In May, single-family insurance applications rose by 4.5 percent—which is about a 124,000 applications—compared to May of the previous year. This increase included 25,000 applications from the Streamline Refinance Program which is a massive 225 percent increase compared to the previous year.

Industry insiders speculate that the FHA’s numbers bode well for the Administration and, by proxy, the nation’s prospective homeowners.

“With each passing day, FHA’s financial condition is improving as the problem loans from 2005-2008 become a much smaller percentage (under 15 percent) of FHA’s portfolio,” said Brian Chappelle, a bank consultant from Potomac Partners in Washington in a Businessweek interview.

Some insiders express caution since the fiscal year is not over.

“We’ll see what actually happens. In the past they have had slippage between what they say in August and what happens in October or November,” said Edward Pinto, a housing specialist from the American Enterprise Institute.

FHA home loans will continue to be desirable for many borrowers since the government insurance of these loans makes them favorable financing for lenders to offer. However, despite the FHA’s own success, it remains a necessity for jobs to grow to provide the necessary income needed to pay monthly mortgage payments. These monthly mortgages can bring the American dream of homeownership back to America’s presently troubled times.