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When the recession tanked housing, private mortgage insurers turned away from the mortgage market. FHA stayed and continued to insure loans so homeowners could get mortgages to purchase and refinance their homes.
FHA went from insuring 3.77% of mortgages in FY 2006 to insuring 19.13% of all mortgages in FY 2010. FHA’s market share rose not because it offers a better deal than the private sector, but because the private sector wasn’t making loans available.
Without FHA, there would have been even fewer loans and therefore fewer people to buy homes during the downturn. And the housing market is a huge driver of the U.S. economy.
FHA benefits existing homeowners, too. Those who use FHA to refinance save an average of $220 per month.
Before FHA was created in 1934, there was no 30-year, fully amortizing home loan. Homeowners who couldn’t refinance after the first five years of the loan (which was almost impossible after the Depression hit) had to pay off their loan.
Back then, you needed a 20% downpayment. Saving that much money was a great barrier to home ownership. Today’s FHA allows borrowers with good credit to buy a home with as little as 3.5% down and to refinance easily.
FHA insured half of all Hispanic and African-American home mortgages in FY 2012.
Nearly 80% of new FHA mortgages go to first-time home buyers.
Being there during challenging economic times isn’t easy, and the recession affected FHA’s financial cushion.
Changes FHA has made in its mortgage programs to improve its finances:
Raised its insurance premiums five times between 2008 and 2013.
Made lenders look more closely at borrowers with low credit scores. (The average FHA borrower’s credit score rose from 650 in 2011 to 696 in 2012.)
Requires bigger downpayments from borrowers with lower credit scores.
Increased assistance to financially troubled FHA borrowers to reduce foreclosures.
Continues to tweak its underwriting rules to reduce the number of bad loans and build its reserves.
“No down” is long gone. FHA ended in 2009 a program that let sellers cover the cost of buyers’ downpayments. Twice as many of these buyers defaulted, compared with those FHA borrowers who made their own downpayments.
Having FHA on the hook (and therefore the taxpayers) to cover losses on mortgages made primarily to low-income, first-time home buyers makes some politicians nervous — even though that’s never happened in FHA’s entire history. The premiums borrowers pay have always fully covered the cost of the program.
Some politicians would like to limit access to FHA-insured mortgages by raising downpayments and cutting down the size of loans FHA can insure.
Unfortunately, every time the downpayment requirement goes up:
It gets harder and takes longer for people to save enough money to buy their first home.
Then people have less time to build home equity they need to fund their retirement, their kids’ college educations, or a new business.
People who live in expensive markets where even a modest home can cost a lot, and who can’t get private-sector loans because they have small downpayments or less-than-pristine credit, need FHA just as much as people in average-cost markets.
If buyers can’t get loans, that can slow or halt the housing recovery in high-cost areas. Letting FHA insure bigger-than-usual loans brings needed mortgage money to those markets.
What the proposals to rein in FHA all have in common is that they make it tougher for FHA to do what it’s designed to do — step in and insure loans when the private market backs away.
Jeannette Bernay has been in the real estate industry for over two decades. She lives in western Washington State on an 8-acre lot shared with her two horses, two dogs and three cats.
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