It appears the FHA changes that the government has been passing have been working, at least in terms of increasing the number of people getting FHA loans. These changes most notably include the sharp increase in the maximum loan limits, something that opened up the FHA program to a load of new markets. FHA loan applications were up 133.9 percent in July, compared to conventional loan applications, which fell 50.2 percent in July, according to a survey conducted by the Mortgage Bankers Association (MBA). While the new changes are certainly having an impact, the bigger question is whether or not this is actually a good thing.
Beyond the fact that the FHA program has been opened now to higher priced markets, one of the biggest selling features for the FHA program is the low down payment requirements. Typically, FHA loans only require buyers to put down 3 percent, which in today’s lending environment is about the lowest down payment a buyer can hope for. If buyers use one of the down payment assistance programs, though, they can actually get 100 percent financing. While the new housing bill includes a provision meant to shut down these programs October 1st, a separate bill is in the works to bring them back. How that shakes out remains to be seen, but with or without the down payment assistance programs, FHA loans still represent the highest LTV loans on the market right now.
With the housing bubble is still not deflated, and foreclosures still wreaking havoc across the country, it is concerning to me that the government is adding more and more to its housing portfolio. This is the same debt that is crippling financial companies, yet we are trading treasuries for mortgage securities and originating all kinds of new high LTV, high risk loans. With the debt load we already have, the last thing we need is for all of this housing stuff to go bad on us, too.
We can of course debate whether these additional risks are justified by the potential economic benefits that will be received by saving the housing market from collapsing. Assuming that the market can be saved, my question becomes: At what cost? Will we ultimately be better off, or will we just end up even worse than before? The story I wrote about yesterday certainly doesn’t help me feel better about this, either.
Just a point of clarity - the 100% FHA loans are going away as part of the new legislation. Majority of lenders have stopped offering this program.
It is likely that conventional loan programs will become more popular in 2010 as private mortgage insurance becomes more available.
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