Are Recent Changes at FHA Threatening Your Home Value and Economic Growth?
Fast Fact: Before 1934, not even 10% of Americans could afford to buy a home. FHA changed that, raising the rate to more than 60%. Now it’s under duress.
Before the Federal Housing Administration (FHA) was created in 1934, only folks with lot of cash — enough for at least a 50% percent down payment — could get a home loan.. Even then, they had to repay those loans in just a few years because before FHA, there was no such thing as a 30-year mortgage.
Fast forward to today, and FHA backs over a trillion dollars in home loans, enabling millions of average Americans, not just the rich “land barons” of yesterday, to achieve the dream of home ownership.
HOW DOES FHA DO THAT?
Contrary to popular belief, FHA does not actually make home loans. Instead, FHA insures loans made by banks that adhere to FHA underwriting guidelines. This encourages banks to make home loans, which helps create a healthy economy.
FHA’s strategy is to help first-time home buyers get into the market. Its stated purpose is to insure loans for first-time home buyers. Doing so enables existing home owners to sell their homes and move up, essentially keeping the entire housing industry moving forward.
HOW DOES FHA HELP FIRST-TIME HOME BUYERS?
FHA requires only a 3.5% down payment, as opposed to 5% required by Fannie and Freddie and 20% by conventional loans. It also allows:
- The use of gift and public assistance funds toward the down payment;
- Sellers to assist with costs;
- The inclusion of costs in the loan amount;
- Approval with lower credit scores.
For decades the FHA guidelines and systems worked well, helping to grow the U.S. home ownership rates from single digits to well over 60%.
But, as we all now know, at some point during the last decade, banks began originating riskier loans, which caused the real estate bubble to burst and borrowers to default. In the end, FHA had to pay for the loans it insured.
SO, WHAT’S THE PROBLEM?
Like the rest of us, FHA did not anticipate or prepare for a hit this massive. So, for the first time in its history, FHA had to ask Congress for $1.7 billion in taxpayer money to help cover over $50 billion in losses.
Not long after that, the Department of Justice began demanding reimbursement from banks that made risky loans, alleging they had violated FHA’s underwriting guidelines. In response, banks claimed the guidelines weren’t clear. However, they’ve agreed to pay billions of dollars to settle these investigations and lawsuits.
SPECIAL PROBLEMS FOR CONDOMINIUMS
Condominiums are often the most affordable home ownership option for first-time buyers, small families, single people, and older Americans. But only condos approved in advance by FHA can be purchased by buyers using an FHA loan. Unfortunately, due to changes made at FHA when the real estate bubble burst, about 60% of condo projects seeking FHA approval this past year were denied. And a procedure, called “Spot” approvals, for condominiums that choose not to complete the extensive FHA approval process, has been entirely eliminated. As a result, many condo sales are falling through and the prices of some condos are even dropping.
SO WHAT’S THE STATUS NOW?
FHA has shored up its finances to protect itself from another massive hit. But the downside is that today’s first-time buyers are essentially paying for the mistakes made by bubble buyers:
What FHA did:
- Raised the upfront mortgage insurance home buyers must pay to 1.75% of the loan amount.
- Raised the on-going annual mortgage insurance home buyers must pay to 1.35% of the loan amount.
- Required home buyers to pay mortgage insurance for the entire life of their loan even though the actual risk of default is reduced over time as the buyer builds equity and has some “skin in the game.”
All told, FHA fees now total almost a quarter of the average monthly mortgage payment.
Here’s a real world example:
For a $300,000 home purchase with the minimum down payment, home buyers must now pay an additional $5,066 in upfront fees, and an additional $3,900 in on-going fees each year.
Even worse, millions of qualified first-time buyers are getting shut out of the housing market and unable to become homeowners, worsening the adverse effects on home sales, values and our economy.
WHAT ARE THE BANKS DOING?
Blame it on the fact they were investigated and sued, but banks are originating fewer FHA loans:
- Wells Fargo is now originating 82% fewer FHA loans.
- Bank of America is now originating 72% fewer FHA loans.
- JPMorgan is now originating 55% fewer FHA loans.
WHAT TO EXPECT NEXT?
In 2010, FHA insured over a million new home loans for first-time buyers. But so far this year, not even half that number have been approved for FHA loans.
Minority first-time home buyers are having an even tougher time. More than half of minority buyers count on FHA for their home loans. Without FHA, they may never achieve their dream. At the very least they’ll have to wait longer.
Without FHA, a 20% down payment is often required. While it would take an average American family fourteen years to save a 20% down payment, that time frame rises to 26 years for an average Latino family, and 36 years for an average African American family.
THE GOOD NEWS
There are new FHA initiatives under consideration.
The Loan Quality Assessment Framework is designed to give banks more clarity, and encourage them to originate more qualified FHA loans.
The “Homeowners Armed With Knowledge” (HAWK) program would give first-time home buyers a discount on FHA mortgage insurance costs in return for taking home buyer educational classes and making payments on time. HAWK is founded on the principal that first-time home buyers who receive financial counseling are 30% less likely to default.
The program would provide:
- 50-basis point reduction in the upfront FHA mortgage insurance premium.
- 10-basis point reduction in the on-going annual mortgage insurance premiums.
- 15-basis point reduction in the annual mortgage insurance premium if the loan is still current after two years.
- But even these discounts will only save the average borrower $325 a year.
Most agree this is not enough. Over 40 million Americans will turn 34, the average age of a first-time FHA home loan borrower, over the next ten years. FHA needs to be ready with common sense guidelines, programs, and fees.
The good news is that the Department of Housing and Urban Development’s (HUD) new director, Julian Castro, recently agreed, saying we need to “remove the stigma of promoting homeownership” that pervades America today in the aftermath of the real estate bubble.