Tom Kelly: FHA asked to do way too much

The conventional lending system wants more skin in the mortgage game. We all get that. But should it be an arm and a leg?

It’s driving FHA off the playing field.

Because of the risks now associated with home mortgages, the Federal Housing Administration has become our go-to guy for loans. That’s because all FHA loans are insured by the federal government against default. Since the mortgage meltdown and the resulting stringent lending guidelines, more borrowers have taken the less onerous road offered by FHA requirements.

The problem is that road has become jam-packed with people who were never supposed to be on it. FHA was founded to make loans to a select number of people based on need and income. It has gone to funding three percent of all mortgages in 2006 to more than 40 percent today. More loans mean more delinquencies and the Department of Housing and Urban Development (the agency that oversees FHA) now has its capital reserve ratio below the level that Congress mandates.

And now we learn FHA has become a major player in apartment lending?

FHA should return to its role of helping a select few, not the general population. It was founded on those principals. However, the housing industry should be spending more time trying to mend the secondary markets and securitization (making non-government loans easier to get) than chastising HUD for not watching its cookie jar. It got raided by a bunch of people not invited to the party but HUD played the gracious host and now is paying the tab for “conforming” lenders who fell by the wayside.

In a recent report, the George Washington University’s Center for Real Estate and Urban Analysis found that . . . “in the wake of significant declines in home prices, we believe FHA could reduce its loan limits by approximately 50 percent and still almost entirely satisfy its target market. That would reduce its current large market share, which is difficult for FHA to manage.”

How could it expect to manage a growth curb that jumped from a six percent market share to 40 percent? In 2006, conventional money was so easy to get that borrowers didn’t need FHA, so six percent is not a good example. In 1999, FHA had 13 percent of all loans, which is about the load it was expected to bear.

Historically, when government accepted responsibility for providing low-income housing, it was at the local level, particularly by county government. With the collapse of the banking system in 1929, the federal government was forced to produce solutions to what quickly became a national housing crisis. Most home loans then were short-term, non-amortizing deals financed by local investors or local banks. Most of these loans forced home buyers to refinance their homes every few years at the prevailing interest rate.

The Roosevelt Administration began a number of initiatives directed at stabilizing the nation’s housing stock, encouraging home construction, and promoting home ownership. The first of these programs was the Federal Home Loan Bank System that established a complex system of government support for home mortgages. A short time later, the Housing Act of 1934 created FHA, which served as a review committee for banks and other loan institutions to make loans to low-income families.

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 One 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.

The agency first introduced and stood by the country’s most popular reverse mortgage product and the purchase-rehabilitation package known as the FHA 203K loan.

All of these programs are targeted for particular customers. That’s why the authors of the George Washington University study suggest the FHA market share should return to 10 to 15 percent by reducing the loan amounts on FHA loans. While exceptions could be made for cash-strapped seniors and reverse mortgages, wealthy borrows were never on the FHA landscape.

Reducing the FHA loan ceilings just might push the conforming market to get its act together.

Tom Kelly’s new E-book “Bargains Beyond the Border: Get Past the Blood and Drugs: Mexico’s Lower Cost of Living Can Avert a Tearful Retirement” is available online at Apple’s iBookstore, Amazon.com, Sony’s Reader Store, Barnes & Noble, Kobo, Borders Books, Diesel eBook Store, and Google Editions.