Should FHA Mortgage Lenders Get 100% Protection?

There are two interesting FHA mortgage figures floating around that may surprise a lot of people: At the end of June, the FHA had 7,151,199 single-family mortgages outstanding and these loans represent had a balance of $994.6 billion.

That means the trillion-dollar mark should be hit fairly soon, probably in the next month or so.

The enormity and importance of the FHA is sometimes unrecognized. In very simple terms, were it not for the FHA insurance program the housing market would have collapsed and with it the economy.

FHA Loan Limits

This is worth bringing up because of the conversation in Washington. On one hand we have pious worries that the FHA will be over-utilized. On the other there is now a push to continue current FHA mortgage loan limits, limits scheduled for reduction in October.

Think of it as a love-hate relationship.

The Mortgage Bankers Association says it now “urges Congress to extend the higher loan limits for Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) at least through the end of 2012. While we had hoped improved economic conditions could warrant a return to the loan limits established by the Housing and Economic Recovery Act of 2008, the reality is that the temporarily higher loan levels are still needed.”

And why is that?

“If the temporary limits are allowed to expire on October 1, 2011, obtaining financing will become more difficult and expensive for borrowers in many of our major metropolitan areas, which in turn would inhibit home purchases or the ability to refinance into more affordable mortgages.”

But again, why is that? Why is it that lenders in the private sector, the folks who benefited from government bailouts worth trillions of dollars, are unable to make mortgages without FHA help?

The answer is that the FHA has proven to be very good for both borrowers and lenders.

Skin In The Game

Borrowers see the FHA as a safe and solid insurance program which allows them to finance property with 3.5 percent down. For lenders the FHA is also an insurance program, one which covers 100 percent of any loss.

Here’s a modest suggestion: Lenders now want to retain those higher FHA loan limits and the insurance coverage they provide. That seems okay — but ONLY if we also have an equity requirement for lenders.

Let’s continue the higher loan limits but let’s also reduce the FHA guarantee to something more sensible, say 95 percent of the principal amount, or maybe 90 percent.

In other words, in the same way that borrowers are supposed to have some skin in the game, why not lenders?

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Posted in: Mortgages

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