Story of the year? FHA to the rescue

Agency steps up in chaotic market

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Dec. 30, 2009

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Agency steps up in chaotic market

Tom Kelly
Inman News

Every time the U.S. Department of Housing and Urban Development makes a change or looks at its financial stability, you hear howls about its function in housing. Should the government really be involved in homes and loans?

Some members of Congress would like to see the Federal Housing Administration agency taken out of HUD and put into the private sector.

For years, "government housing" options -- specifically FHA-insured loans -- were perceived as being problematic and heavily wrapped in red tape. The favorite line for real estate salespersons became, "Of course your FHA loan is screwed up ... can you spell HUD backwards?''

But, guess what? HUD also steps up. HUD tried programs that the private sector wasn't quite ready to digest. The agency first introduced and stood by the country's most popular reverse-mortgage product and also a couple of its first cousins -- low-downpayment first mortgages and the purchase-rehabilitation package known as the FHA 203K loan.

In 2009, when money was tight and jumbo money became so difficult to find, FHA became the safety valve for many mortgage brokers. Some lenders report that FHA loans make up nearly 40 percent of their business, nearly double the volume of the past five years combined.

While the periodic dark side of the agency has surfaced over time -- notably investigations of former secretaries and allegations that some programs were labeled "inept, detrimental and costly'' by the Office of Inspector General -- HUD and other government agencies are a critical part of the public housing landscape -- despite the calls by some critics to make the agency private.

HUD officials have expressed worries that if FHA went private, borrowers would be charged higher fees and interest rates than those currently charged, resulting in fewer homeownership options. In addition, the department points to a task force conclusion that the sale of FHA to private owners would not attract any buyers offering a reasonable price.

FHA insures loans so that if the borrower defaults, the lender is guaranteed to receive the outstanding mortgage amount. For the past 75 years, an FHA loan has been the primary low-downpayment option for homebuyers. The popularity of FHA loans had dwindled in the past decade as the private market has grown more sophisticated and efficient at creating and providing mortgage money. This year, lenders returned to the security that FHA provides in droves for their borrowers in all categories.

While HUD is mostly known for its FHA low-downpayment home loans, FHA has a home-improvement loan program, too, and it has come in handy for folks who need cash and can't get a home equity loan due to already high loan amounts or slumping home values.

FHA Title 1 loans of up to $25,000 are available to owner-occupants and investors who want to repair or improve their property. Up to $15,000 can be obtained regardless of home value. And, if you need $5,000 or less, no security is necessary.

Historically, when government accepted responsibility for providing low-income housing, it was at the local level, particularly by county government. With the collapse of the banking system in 1929, the federal government was forced to produce solutions to what quickly became a national housing crisis. Most home loans then were short-term, non-amortizing deals financed by local investors or local banks. Most of these loans forced homebuyers to refinance their homes every few years at the prevailing interest rate.

The Roosevelt Administration began a number of initiatives directed at stabilizing the nation's housing stock, encouraging home construction, and promoting homeownership. The first of these programs was the Federal Home Loan Bank System that established a complex system of government support for home mortgages.

The Housing Act of 1934 created the Federal Housing Administration (FHA), which served as a review committee for banks and other loan institutions to make loans to low-income families.

A prime traditional FHA target -- first-time homebuyers, many of whom are new to this country -- are pushing the housing ladder. Analysts believe that immigrants hold the keys not only to the residential building industry but also to other critical segments of the economy.

That's because many newcomers pay cash, reducing the concerns of escalating consumer debt, except in big-ticket purchases like homes. Therefore, HUD is the critical player at both ends of the housing finance ladder -- first-time loans and reverse mortgages.

In 2009, the agency showed it was the go-to player for all loans in between. It now has more than 5.2 million insured single-family mortgages and 13,000 insured multi-family projects in its portfolio.

Tom Kelly's book "Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border" was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com.

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