FHA Numbers On The Rise — More To Come

by Peter G. Miller
October 9th, 2008

The Mortgage Bankers Association has come out with a new study which tells us a lot about FHA mortgages.

FHA loans have been getting bigger. The 2008 MBA Cost Study shows that a typical FHA mortgage originated in 2003 has an initial balance of $162,454 — a figure that rose to $195,227 in 2007.

That’s quite a jump, especially when you consider what’s happened to household income: Between 2000 and 2007 household income as expressed in buying power has fallen by $324 according to economist Jared Bernstein.

You can see the problem: If mortgage size is increasing but buying power is declining then there has to be a squeeze somewhere — unless interest rates fall and reduce monthly costs.

In fact, that’s exactly what happened. In June 2003 a typical 30-year fixed-rate mortgage could be had at 5.21 percent plus .5 points. That was an astonishingly low rate, something unseen since Eisenhower was in office.

Unfortunately the joyous interest levels from the summer of 2003 did not continue. They rose, but they did not rise much. According to Freddie Mac as of the start of October rates for fixed-rate conventional loans stood at 6.10% plus .6 points.

Given that the increase in interest costs has been so small — and given that mortgage rates have been far higher in past years, indeed, often above 10 percent — it seems amazing that so many people can have so many mortgage problems. Imagine where we would be if mortgage rates “shot up” to 7 percent — or 8 percent.

The MBA study also looks at FHA mortgages and marketshare: Based on dollar amount, FHA loans represented 5.8 percent of the market in 2003 — a percentage which fell to just 3 percent in 2006 at the height of the toxic loan boom. In 2007, says the MBA, FHA marketshare rose to 5.3 percent.

The betting here is that when the 2008 figures emerge we will see a massive increase in FHA marketshare. And why not? If you have a fixed-rate FHA, VA or conventional loan you have a hedge against inflation and no need to worry about prepayment penalties, rising rates or looney payment increases. In today’s world, that’s not bad — so expect more people to catch on.

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