Is the Federal Housing Administration losing some of its post-boom, post-bust oomph? Is the Obama administration’s plan to gradually throttle back FHA’s home mortgage insurance volume already having effects — and if so, what might this mean to buyers?
There are definitely signs that something’s brewing:
• Total applications for FHA-insured single-family mortgages are down 30 percent year-to-year through March, according to the agency’s data. Applications from prospective home purchasers are down 35 percent. FHA’s popularity with buyers previously had sustained its high origination volumes.
• FHA put its second increase in premium charges in six months into effect on April 18. Higher premiums mean higher monthly payment requirements for buyers, and could have the effect of squeezing some consumers with tight budgets out of the market entirely.
• The private mortgage insurance industry, which competes with FHA for borrowers who make low down payments, is touting its newly resurgent conventional mortgage products, which may offer significant monthly savings when compared with FHA.
• Some of the agency’s long-standing advocates are wondering aloud whether the administration’s policy tilt toward more private-sector involvement in the mortgage arena may be hurting first-time buyers who can’t bring large cash resources or high credit scores to the table.
For example, Mario Yeaman, senior loan officer for Milestone Mortgage in Manhattan Beach, Calif., said, “Here you have our last refuge for ordinary people to buy a home, and the government is making it tougher to qualify” by raising insurance premiums.
Brian Chappelle, a principal of Potomac Partners, a Washington, D.C.-based mortgage banking industry consulting firm, said he worries about the direction FHA has begun pursuing.
“FHA’s role was designed to be the first rung on the homeownership ladder. If you raise fees, increase down payments and lower mortgage limits, it would be a serious impediment for future buyers and the economy,” he said.
Chappelle’s concern about higher down payments stems from the Obama administration’s February “white paper” on housing reform, in which policymakers called for higher down payments across the board — including at FHA. To date, no increases have been proposed by the agency, but some analysts believe that a move to a 5 percent minimum down — up from the current 3.5 percent — would not be surprising in the months ahead. FHA’s maximum loan amounts might also drop significantly this October if Congress does not renew the current economic recovery law ceilings, which now top out in high-cost areas at $729,750.
Given these developments, how does FHA financing stack up against rivals in the low down payment space right now? Private mortgage insurers have a quick response: They say their lower monthly costs already are winning back some of the business they lost to FHA during the rough times of the recession.
For instance, Radian Guaranty Inc., a major home loan insurer, claims that in the wake of FHA’s premium increases, a low down payment conventional mortgage carrying its insurance coverage now requires monthly payments 15 percent lower than FHA-insured mortgages for borrowers with FICO credit scores above 720. Radian provided this cost-comparison example to illustrate: Say a buyer has got FICOs above 720, and you need a $285,000, 30-year loan with 5 percent down at a 5 percent interest rate.
The FHA mortgage would cost $1,806 in principal and interest per month. The same loan insured by Radian would cost anywhere from $1,530 a month to $1,753, depending on the type of premium payment plan the buyer chose. The cheaper alternative would involve an up-front cash payment of the insurance premium; the higher-cost alternative would involve standard monthly payments of the premium.
Brien McMahon, chief franchise officer of Radian, said in an interview that as a general rule, private insurance on low down payment loans will now beat FHA whenever the buyer puts down 5 percent and has a 720 or higher FICO, or puts down 10 percent and has at least a 680 FICO.
So does this mean that all buyers with low down payments should now abandon FHA in droves and switch to conventional loans? Hardly.
David Van Waldick of Western Realty Finance in Carlsbad, Calif., said the majority of FHA users can’t fit into the private insurers’ high-FICO, strict underwriting model, so those vaunted savings may be illusory. FHA, by contrast, continues to offer much higher and more flexible maximum debt-to-income ratios, far more generous underwriting and lower down payments, and will accept FICO scores that conventional lenders and private insurers won’t touch.
Bottom line: If a buyer is purchasing a home with a small down payment, they should check out both FHA and the private alternative with their loan officer. It’s true that FHA has just gotten a little more expensive. But it may still have the total package needed to do the deal.
Ken Harney is a syndicated real estate columnist.