In the current credit squeeze, if you have less than a 20 percent down payment, there’s pretty much only one major source of mortgage financing available: the Federal Housing Administration, the Depression-era home loan insurance agency that still offers 3 percent down, 30-year, fixed-rate mortgages with consumer-friendly credit standards, even on jumbo loans in high-cost areas of California and the East Coast.
But there is a potentially troublesome problem looming for the FHA: New loan volume is exploding — tripling in the past 12 months alone — and Congress has handed the agency the responsibility for almost all the government’s efforts to keep economically distressed homeowners out of foreclosure by refinancing their unaffordable loans.
The FHA says it needs to hire more staff and upgrade its technology to be able to handle the crush of new business, but it complains that Congress hasn’t appropriated the necessary funds — $65 million — to do the job fast enough. Capitol Hill appropriations committee staff dispute some of that, but the specifics of the arguments over dollar amounts aren’t the issue.
The real question is this: Can a government agency whose market share dropped below 3 percent during the heyday of the subprime boom now properly handle explosive volume rocketing it to an estimated market share of 30 percent this year? Are both the agency and Congress — which controls the purse strings — up to the task?
Mortgage industry, home building and real estate experts worry about the possible consequences of shifting too heavy a share of the mortgage market too quickly to an agency that may be inadequately staffed or funded. Howard Glaser, who served during the Clinton administration as acting general counsel for HUD, the parent department for the FHA, worries that loading on too much business without properly funding staff and technology upgrades raises the odds of breakdowns.
“FHA is assuming the risks of a mortgage market abandoned by private investors — without the risk management tools,” he said. “My fear is that next year at this time, we will be debating an FHA bailout.”
Steve O’Connor, senior vice president of the Mortgage Bankers Association, agreed there’s danger lurking in the massive increases in business going to the FHA. “You just can’t expect to fit that amount down the same size pipe — you’ve got to expand the size of the pipe” by funding additional staff and technology, he said. “It’s a very serious concern.”
Other industry groups, including the National Association of Home Builders and the National Association of Realtors voice similar worries. Dick Gaylord, president of the Realtors, said “if [the FHA] is truly going to serve its growing constituency,” it will need more money and people.
The FHA — for years the forgotten federally controlled stepchild of an industry dominated by Fannie Mae, Freddie Mac and the Wall Street mortgage bond machines — is now insuring more than 140,000 new loans a month, according to agency statistics. It has $400 billion in outstanding loans in its insurance portfolio and runs its home mortgage business with 937 employees in offices spread around the country. The agency wants authorization to add 160 employees immediately.
Though historically a resource for first-time buyers, minorities and people with imperfect credit, the FHA increasingly is the go-to place for people who have above-average credit backgrounds but lack — or choose not to use — large amounts of down-payment cash. In August, according to agency data, approximately 23 percent of new FHA home purchasers had FICO credit scores above 720 — far beyond the proportion of prior years. In the same month, just 12 percent had FICO scores below 600.
With mortgage limits extending into the jumbo category, the agency is attracting large numbers of customers from high-cost areas of the country, especially California and the mid-Atlantic states. One of 10 new borrowers in August was from California.
To some mortgage lenders and loan officers, the FHA is now the main game in town. “Nothing competes with them,” said Paul Skeens, chief executive of Colonial Mortgage Group in Waldorf.
Fannie Mae and Freddie Mac, both now in federal conservatorship, have steadily added fees to the point where “they just aren’t competing with FHA on down payments or costs,” Skeens said. In 2001 and 2002, Skeens’ firm did just one-quarter of 1 percent of its volume in the FHA. Now it’s 60 percent.
“The last thing we need right now, with the shape the housing market is in,” he said, “is for FHA not to function well.”
By Kenneth R. Harney