2010 and the FHA

by Peter G. Miller
January 6th, 2010

It was in mid-December when the National Association of Realtors released some interesting figures: FHA loans accounted for the financing used by 39 percent of all recent buyers while the number of first-time home buyers continued to climb to 51 percent.

“FHA helps provide affordable mortgage financing to homeowners, particularly first-time home buyers who are so important in drawing down inventory to help stabilize the current housing market,” said NAR President Vicki Cox Golder. “These recent survey results reaffirm that, despite its current challenges, FHA is a critical part of the American housing fabric.”


The catch is that I’m not so sure what “current challenges” the FHA faces. Does the FHA have problems and worries? You bet — think of rising delinquency and foreclosure rates as well as more claims against the FHA reserve fund.

But these are not just FHA problems. Instead, they’re a reflection of a troubled marketplace. It’s not only the FHA loan insurance program which is in trouble, it’s a marketplace which has hurt all mortgage insurers. Delinquencies and foreclosures are not just a worry for the FHA, they are also a problem for prime, subprime and Alt-A financing.

Truth is that 2010 may be a very good time for the FHA loan program. Here’s why:

First, there are fewer lenders then they used to be — think about all the toxic loan lenders who are no longer with us.

Second, FHA lenders have become a lot more conservative than they once were. The reason has been a new push by HUD to assure that lenders complete all FHA requirements for each loan.

Third, the public has been burned by private-sector “affordability” loan products. The public has also seen that FHA borrowers have been well-treated — the FHA has a terrific “cure” rate for borrowers who become delinquent. The result is that the FHA enjoys a lot of public good will.

Fourth, I expect interest rates to rise. This is not going to be a surprise given that we are near the historically-low end of the rate chart right now — there just isn’t that much lower to go. Low rates are very good for real estate and what’s good for real estate is usually good for the FHA.


But the real prospects for the FHA are well outside anything related to HUD or the FHA program itself. The looming economic issue concerns the matter of employment. As I tell folks, people without jobs don’t buy houses. They also don;t make their mortgage payments.

The central real estate question for 2010 is what happens with employment. Not instantly, but what happens during the next few months?

If unemployment levels stabilize or fall then that should be seen as good news, not just for the FHA but the economy as a whole.

Alternatively, if unemployment levels remain weak or get worse then real estate values will be just one of a bunch of huge problems. The FHA, private loan insurers and private-sector lenders in general face losses as big or bigger than we have seen in the past few years.

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