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 you as a buyer? There are definitely signs that
— Total applications for FHA-insured single-family mortgages are down
30 percent year-over-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
— FHA put its second increase in premium charges in six months into effect
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.”
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, a major home loan insurer, claimed 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 you’ve
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 you chose. The cheaper
alternative would involve an upfront cash payment of the insurance premium;
the higher cost alternative would involve standard monthly payments of the
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 you’re purchasing a home with a small down payment, check out
both FHA and the private alternative with your loan officer. It’s true that
FHA has just gotten a little more expensive. But it may still have the total
package you need to do the deal.
Ken Harney is a syndicated real estate columnist.