There has been a whirlwind of talk swirling around the Federal Housing Administration (FHA) and its continuous drop below the 2% reserve requirement mandated by Congress. Most economists and financial experts believe the FHA reserves won’t fall below zero. In fact, talk is that the reserve amount even seems to be showing signs of a positive outlook.  

A year ago, the FHA reserve stood at 3%, but a recent independent study showed this reserve rate to be at a dangerously low level of .53%. The main reason cited for reaching this almost all-time low level is the FHA’s guarantee of an unprecedented amount of loans in order to stimulate the housing market as a whole. With this increased demand, FHA has been forced to implement more stringent lending guidelines, implement a higher credit score and has done away with certain programs such as seller-financed down payments and streamlined underwriting processes.

Even with all of these changes, overnight results are not realistic. It took time to get into the current dire situation and it will take time to get out of it. Most of the scenarios and possible outcomes run by the independent company show that recovery for FHA’s reserves isn’t expected until 2012.

There is a reason why governmental programs and agencies are created. Maybe nothing illustrates this better than the Federal Housing Authority (FHA). FHA is responsible for instituting programs and initiatives that have saved almost a million homeowners from possible foreclosure and financial ruin with its refinance program. This figure doesn’t include the almost two million borrowers that took advantage of bargain housing prices and low interest rates to finance the purchase of a new home, permitting 80% of these buyers to buy their first home—all with FHA secured mortgage financing.  FHA is currently responsible for originating almost 25% of all mortgages originated today.  

While the FHA is not a panacea for the housing marketing and economic problems, it has certainly contributed positively, which leaves many wondering how bad the situation may have gotten without the efforts of the FHA. FHA is experiencing delinquencies and foreclosures from borrowers as many mortgage lenders around the country are. One problem was the Congress mandatory reserve level the FHA is expected to keep fell below the 2% mark at one point.

To overcome its challenges the FHA has tightened underwriting guidelines, increased premiums, increased its down payment requirements and increased minimum credit score requirements. Overall, the FHA reform efforts have helped to make the mortgage market look a little bit brighter.

FHA mortgage financing allows for a much lower down payment of 3.5%.  FHA loans are a smart option for first time home buyers and those with less than perfect credit too.  There are loan limits for FHA loans and it varies by state and county, however, there are no income limits for FHA mortgage financing.

FHA mortgage financing allows for a generous 6% seller help in closing costs.  This is especially favorable to first time home buyers since most are usually cash poor.

FHA loans require a minimum credit score and that can vary depending on the lender you deal with.  It’s beneficial if you can work with a mortgage broker who has access to many different FHA lenders since many have their own idiosyncrasies in lending standards.

Doing its part to help stimulate the tumbling housing market, FHA increased its loan limits as highs as $729,750 (in some areas of the country). Now there is talk of making this temporary situation a permanent one. The increase is set to expire at the end of 2009, but experts fear that allowing the size limitations to return to its original amounts may hinder full recovery of the housing and lending markets.  

Benefits of the Program

There are several reasons why organizations such as the National Association of Realtors (NAR) support turning the temporary limitations into a permanent situation. The main reason is that the limitation increase is contributing to the housing recovery—making mortgage financing more affordable for buyers. Second, it helps to create a more liquid housing market.

With the failure of the private mortgage niche of the lending market, the program limitation increase has played a starring role in selling homes, which has decreased the home inventory. The decrease in home inventory has led to stabilization in home prices.

FHA increasing its loan limitations has contributed to the recovery of the housing and lending market. Making these loan limitations permanent may also contribute to a more permanent recovery of these markets, rather than putting a band-aid on what has definitely been a long-term problem..

Historically FHA loans have had more lenient qualifying standards compared to their Government counterparts Fannie and Freddie but with more stringent paperwork and appraisal requirements, they weren’t too popular.

With the subprime meltdown and the tightening credit standards of Fannie Mae in addition to the heavy pricing adjustments, FHA popularity has skyrocketed.  Many believe that FHA had a hand in the mortgage crisis meltdown due to the fact they had really no minimum score requirements (all the way down to 500 was allowed).  Borrowers with 500 credit scores were still getting approved for 97% financing of a primary residence.  And even then, Down Payment Assistance programs effectively turned this into 100% financing.

Now, it seems the opposite extreme is happening.  One major lender recently made it even harder for consumers to qualify for FHA financing by increasing their minimum credit score from 620 to 640.  It’s not uncommon to see other lenders follow when they see a major lender make a move like this.

The FHA rehab program must be doing something right because the amount of mortgage applications submitted under the program increased again in June of 2009. The FHA just reported that its 203(k) Home Rehabilitation Mortgage Insurance Program has almost doubled in 2009 compared to the 2008 numbers.  

The 203(k) program helps real estate buyers and investors that are buying foreclosure properties that are need of repair. Typically, a purchaser of foreclosure property that needs rehabilitation has to obtain several different loans in order to purchase the property, cover the costs for the rehab and then obtain permanent financing once the property rehabilitation is complete.

With the 203 (k) program real estate investors buying foreclosures can obtain one loan to cover all three aspects of the financing process. So does the FHA rehab program benefit real estate investors? It does if these investors are buying foreclosure properties of one to four units. It not only saves them the time required to obtain three different loans, but it also saves them the money it takes to establish three different loans to cover the costs of purchasing, repairing and holding onto one property.

As of August 6, 2009 the FHA program insures $2.7 billion worth of loans. For more information on the FHA 203(k) Home Rehabilitation Mortgage Insurance Program, visit the U.S. Housing & Urban Development website at http://www.hud.gov/offices/hsg/sfh/203k/203k–df.cfm.