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Use of FHA Loans Continues To Soar

by Peter G. Miller
November 26th, 2008

The Mortgage Bankers Association is reporting that in October almost one-third of all loans were government-insured, meaning largely FHA mortgages. That’s up from 10.3 last October.

“The government-insured share has increased from 9.4 percent in January 2008 to its current level of 32.9 percent, which is the highest level observed since February 1991,” says the Association. “Since the MBA survey’s inception in January 1990, the lowest recorded share was 5.8 percent in August 2005 and the highest was 43.8 percent in February 1990.”

Why the increase in government-backed loans? The obvious answer is that many alternative forms of financing are gone, as well as the lenders who made them. A lender today who doesn’t offer FHA financing is like a car dealer who doesn’t sell gas misers — neither is likely to be in business much longer.

In the new universe of shudders on Wall Street, falling home values in most markets and federal printing presses that are overheating, borrowers want loan programs that have sane terms, little down, no surprises and no prepayment penalties. The basic FHA loan fits perfectly with what most borrowers want today, especially first-time buyers who have not had much time to accumulate equity.

The Association makes these points:

___Data from the U.S. Department of Housing and Urban Development (HUD) show that the level of conventional to FHA refinance applications has increased 89.2 percent on a year over year basis in October. Likewise, the actual level of refinances from conventional loans to FHA insured loans has increased 144.3 percent on a year over year basis. Based on the MBA survey, application volume for government-insured loans was up 113.6 percent in October from a year ago, while application volume for conventional loans was down 49.7 percent, showing that borrowers are still moving from conventional to government-insured mortgages.

___In March of this year, the Economic Stimulus Act of 2008 temporarily raised the FHA and conforming loan limits for most areas in the country, which made FHA financing an option for more borrowers. However, the passage of the Housing Bill in July 2008 permanently increased the loan limit to a maximum of $625,500 in 2009, which is lower than the temporary limit of $729,750 for 2008. As a result, most high-cost markets will see declines in their loan limit next year.

___FHA loans typically require lower down payments than those purchased by Fannie Mae and Freddie Mac (the GSEs). Generally the maximum loan to value (LTV) ratio for FHA loans is 97 percent and 95 percent for the Government Sponsored Enterprises (GSEs).

___Conventional GSE loans require Private Mortgage Insurance (PMI) for loans with a loan-to-value (LTV) ratio in excess of 80 percent, while FHA has an upfront mortgage insurance premium. Some borrowers may prefer the upfront insurance premium and monthly insurance payments as it may prove more cost effective for their financial situation.

___Conventional GSE loans typically have higher credit score requirements than FHA loans, therefore borrowers who may not qualify under the GSE requirements may be applying for an FHA insured loan as an alternative.

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