Everybody likes to kick FHA – until help is needed

Every few years some national lender or member of Congress goes on the record and asks if the Federal Housing Administration should be taken out of the Department of Housing and Urban Development and put into the private sector.

Now, the private sector is wondering if it wants any piece of the FHA.
In an earnings call with investors, Jamie Dimon, JPMorgan CEO, said: “The real question to me is, should we be in the FHA business at all? And we’re still struggling with that.”

A few years ago, the answer would have come in another question:

“Where would you be without FHA, Jaime?”

Six years ago, when money was tight and jumbo mortgages became so difficult to find, FHA became a sort of safety valve for many mortgage brokers. Some lenders reported that FHA loans made up nearly 40 percent of their business, nearly double the volume of the past five years combined.

The government’s answer was to balance the problem by giving lenders more money so that they could lend it back to consumers and small businesses. The cash never really came back in a way it was designed.

So FHA was again named to be the ultimate team player – providing more first mortgages, reverse mortgages, purchase-rehab loans – while waiting to see if it would ever get help from its fading stars (Fannie Mae and Freddie Mac) or possibly new players in the private sector.

Little has happened on the new-player front. In addition, lenders’ attitudes toward FHA loans have turned sour after facing steep settlements recently from the Department of Justice and federal regulators. JPMorgan Chase & Co., Bank of America Corp., and others have already paid more than $3 billion in fines for originating faulty FHA loans during the housing bubble.

Which raises the question: Are lenders more concerned about getting caught or underwriting loans that help a variety of borrowers?

What is often underestimated by the private sector is that HUD steps up. It tried programs that the private sector wasn’t quite ready to digest. The agency first introduced and stood by the country’s most popular reverse mortgage product and also a couple of its first cousins-low-down-payment first mortgages and the purchase-rehabilitation package known as the FHA 203K loan.

While the periodic dark side of the agency has surfaced periodically over time (investigations of former secretaries, allegations that some programs were labeled “inept, detrimental and costly” by the Office of Inspector General), HUD and other government agencies are a critical part of the public housing landscape – despite the calls by some critics to take the agency private.

HUD believes if FHA went private, borrowers would be charged higher fees and interest rates than currently charged by FHA, resulting in fewer home ownership options. In addition, the department points to a task force conclusion that the sale of FHA to private owners would not attract any buyers offering a reasonable price.

FHA insures loans so that if the borrower defaults, the lender is guaranteed to receive the outstanding mortgage amount. For the past 75 years, an FHA loan has been the primary low down-payment option for homebuyers. The popularity of FHA loans had dwindled in the past decade, as the private market has grown more sophisticated and efficient at creating and providing mortgage money.

While HUD is mostly known for its FHA low-down-payment home loans, FHA has a home-improvement loan program, too, and it has come in handy for folks who need cash and can’t get a home equity loan due to already high loan amounts or slumping home values. FHA Title 1 loans of up to $25,000 are available to owner occupants and investors who want to repair or improve their property. Up to $15,000 can be obtained regardless of home value. And, if you need $5,000 or less, no security is necessary.

Since the mortgage meltdown, lenders returned to the security that FHA provides in droves for their borrowers in all categories.

Now, the private industry doesn’t want to play ball with FHA? Who is going to serve the customers that fall through the cracks?

Tom Kelly’s novel “Cold Crossover” is available in print at bookstores everywhere and in both print and Ebook form from a variety of digital outlets. Follow real estate agent and former basketball coach Ernie Creekmore as investigates the disappearance of his star player on a late-night boat. Check out the national reviews and put “Cold Crossover” on your list.