FHA Market Share Tops 35 Percent, New Record

by Peter G. Miller
July 13th, 2009

In news that should come as no surprise to anyone, the Mortgage Bankers Association is reporting that in June government-insured loans — meaning FHA and VA financing, but mostly FHA loans — represented 36 percent of all loan applications — the largest market penetration since 1990.

In comparison, the lowest recorded market share was 5.8 percent in August 2005.

“A primary reason government-insured loans have retained a high share of the purchase market is that these loans typically require lower down payments than conventional loans,” said Orawin Velz, MBA’s Associate Vice President of Economic Forecasting. “In addition, lending standards tend to be tighter for conventional loans, especially for loans that require private mortgage insurance.”

Really? Are these the reasons that VA and FHA mortgages are increasingly popular? You have to be kidding.

Down Payments

First, FHA loans require 3.5 percent up front while many conventional loans have been available with nothing down. The National Association of Realtors reports that in “2007, 29 percent of buyers reported that they financed their entire purchase with a mortgage compared with 23 percent in 2008. Among first-time buyers the share with 100 percent financing fell from 45 percent to 34 percent.”

Underwriting

Second, lending standards for conventional loans are not tighter than for FHA financing, they are better for both borrowers and lenders. With an FHA loan you need to fully document your income, assets and debts; you need to have a physical inspection of the property and the property must meet certain standards.

These are the very application standards which were ignored by private-sector lenders during the past few years and a leading cause of the mortgage melt-down. No one could possibly get FHA mortgage financing with a stated-income loan application yet that was just dandy with commercial lenders. Now the private sector has figured out that if you’re going to be a lender you really do need to know how much your borrower earns and whether or not the property has sufficient market value to justify the loan.

What’s really happened in the marketplace is not that FHA loans and FHA underwriting have become more fashionable, instead common sense has begun to infest the underwriting process.

The reason that government-backed loans were so unpopular in 2005 is not that they had terrible terms or high costs, it was that the private sector was offering ridiculous loans with nothing down and invisible qualification requirements. If you had a lung you could get a loan. Meanwhile, the stodgy old FHA was demanding tax records, pay stubs and a look at the property by an independent appraiser.

In the end it was the FHA that did the right thing by sticking to traditional and sensible underwriting standards. People understand that FHA mortgages to buy or refinance a home are safe, sane and without prepayment penalties — and that’s why they’re so popular today. Today you can get a mortgage with a stated-income loan application — but only if you put down 40 or 50 percent of the purchase price in cash. In such circumstances the lender has virtually no risk, at least by traditional standards.

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