from a letter written to the Mortgage News Daily by Brian Montgomery Oct., 2009
There has never been a point in our nation’s history that better illustrates exactly why FHA and Ginnie Mae exist. During these uncertain economic times, their counter-cyclical role of ensuring adequate mortgage activity and liquidity has been necessary and vital.
FHA has saved close to one million sub-prime/Alt-A borrowers from possible financial ruin by allowing them to refinance into a safe and secure 30-year fixed rate mortgage. Another 2 million qualified borrowers (80% of them first-time homebuyers) have taken advantage of the declining house prices and historically low interest rates to purchase a home using FHA. FHA’s role has grown substantially from three percent of lending activity by dollar volume in 2006 to nearly 25 percent of all mortgages originated today. That massive uptick in volume occurred almost overnight beginning in spring 2008.
Through it all…. FHA has helped pump more than $400 billion of mortgage activity and liquidity into the market since 2008, while still managing to deliver a higher credit quality borrower whose average FICO score is 700.
One can only imagine how much worse our economy would be right now without the FHA. However, the growth of FHA in the past 18 months has understandably attracted a lot of attention. While the FHA did not take part in the housing boom, it is feeling its effects.
Reminder: FHA collects premiums from borrowers (revenue) and also pays out claims to lenders when loans go into default and foreclosure (outlays).
The FHA has undeniably tightened guidelines in an effort to help ensure a higher loan quality. Prospective borrowers must verify income and job history as part of a rigorous underwriting process.
As a reminder, I offer the following insight about the strategies the FHA is considering to ensure the market remains confident in the FHA’s risk management models:
* Tighten underwriting criteria
* Increase premiums
* Raise the down payment requirements above 3.5%
* Overlay a credit score cut-off
Looking forward it’s important for all of us to continue advocating for reforms that better ensure a vibrant, transparent, and sound mortgage marketplace. Current market conditions highlight the critical role of the private and public sectors in keeping mortgage credit flowing.
