FHA Mortgages Face New Loan Competition

FHA Mortgages face new competitionFHA mortgages have been under fire for a very long time, not because they’re a “bad” form of financing but because they’re an example of government directly competing with the private mortgage insurance companies. To resolve this “problem” there have been various back-door efforts to scuttle the FHA program, but now the lending industry is beginning to come up with a better idea: Compete openly in the marketplace with FHA mortgages and simply offer alternative — and maybe better — loan products.

The FHA is part of HUD, the Department of Housing and Urban Development. Established in the 1930s in the midst of the Great Depression, the FHA insures qualifying loans made by lenders. If a lender makes a properly-written loan and the financing goes bad then the lender can make an insurance claim against the government. How much coverage does the lender get in the case of foreclosure? That would be 100-percent government protection against virtually all risks.

Insurance claim money comes from borrowers in the form of an upfront mortgage insurance premium (the upfront MIP, now 1.75 percent for FHA forward loans) and an annual mortgage insurance premium (the annual MIP, now .85 percent for forward loans). This money is held in a reserve called the Mutual Mortgage Insurance Fund.

You can see the problem: While political theorists complained about the FHA, lenders see the program as a source of guaranteed profits. As is usually the case, profits always, um, trump, political theories.

What are examples of small-government advocates trying to scuttle the FHA program without leaving fingerprints?

Go back to December 2014, not that long ago. The FHA was set to offer the Homeowners Armed with Knowledge (HAWK) program, a program which would have allowed first-time buyers to purchase real estate with smaller MIP costs in exchange for homeownership counseling and a good payment record. HUD estimated that the typical HAWK borrower would save $325 per year, almost $10,000 over 30 years.

Since the housing industry wants more first-time borrowers to increase local real estate demand and prices, you would think the HAWK program might be welcomed. It was. However, buried in the 1,500-page 2015 federal budget was language which banned the HAWK program: “None of the funds made available by this Act nor any receipts or amounts collected under any Federal Housing Administration program may be used to implement the Homeowners Armed with Knowledge (HAWK) program.”

Which elected official put this language into the budget to help constituents? That’s not clear. When did Congress hold hearings to discuss this matter? It didn’t.

The lobbyists then got out-foxed. Instead of offering discounts to just first-time borrowers, HUD instead moved to reduce FHA fees by .5 percent across the board for forward mortgages. The result was that in fiscal 2015 the FHA insured 1,116,232 forward loans versus 786,355 in fiscal 2014 plus the reserve fund now tops 2 percent of liabilities, the standard established by Congress.

FHA Mortgages & Real Competition

While the public likes the FHA program many lenders do not. The concern is that the government really wants FHA loans to meet FHA standards and when they don’t lenders face large fines and costs, sometimes billions of dollars. Lenders complain that in many cases they’re being penalized for minor clerical issues even when loans are performing.

One result of such conflicts is that traditional lenders – banks – are making fewer and fewer FHA loans. Another result is that nonbanks are making more and more of them. This is perfectly fair in the sense that lenders should be able to choose what loan products they wish to offer or not offer.

Another result is that alternative loan products have begun to appear. For instance, Fannie Mae’s HomeReady program allows first-time borrowers to purchase with just 3 percent down and no mortgage insurance. No mortgage insurance is a big savings so how does the program off-set the risk of failed loans? It has a higher interest rate.

Another example, according to the Wall Street Journal, is a new 3 percent down loan program to be announced by the Bank of America.

It’s a move, says the paper, “that would represent an end run around a government agency that punished the bank for making errors on similar loans.”

As a borrower you just don’t care about lobbyists, lender settlements or marketplace turf wars. Instead, you want sane and sensible loan products at the lowest possible cost. As more and more such products are announced, that can only be good for borrowers.

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