FHA Reports Mortgage Loan Volume Slipping

by Karen Lawson
February 24th, 2010

While we’ve often mentioned FHA’s growing pains resulting from astronomical growth in its market share over the past couple of years, the January 2010 FHA Outlook report indicates wavering volume in FHA home loans in general, and FHA reverse mortgage loans, also called Home Equity Conversion (HECM) loans, in particular. Applications for HECM loans were down 16.2% from December 2009, and declined by 54.2% compared to one year ago. The agency cites likely causes as severe winter weather and stricter requirements for FHA to FHA refinance requirements under the streamline refinance program. I believe larger influences are at work here.

Fewer FHA Reverse Mortgage Loans: Depressed Home Values a Factor?

Falling home values have diminished home equity levels; this would logically cause fewer borrowers to take out FHA HECM mortgages, which provide borrowers age 62 and above to draw on home equity without making mortgage payments. The “reverse” mortgage is paid off when borrowers sell or otherwise vacate their homes. Borrowers taking out HECM mortgages may count on the monthly income provided by these loans for meeting living expenses; if they don’t have enough home equity to provide the needed supplemental income, they would likely pass on a HECM loan. Losses in investment and retirement accounts also narrows options for homeowners with fixed incomes. With real estate markets remaining depressed in many areas, it makes sense that concerns over home equity would reduce interest in HECM home loans.

Unemployment, Financial Security Worries Concern Home Loan Borrowers

FHA HECM loans are only part of a trend of falling market share for the agency’s mortgage loan programs. FHA home loan applications declined by 51.8% from 243,511 in January 2009 to 126,043 applications during January 2010. I see national unemployment figures lingering near the 10% benchmark as a major obstacle for homebuyers. Potential buyers are holding fast until conditions improve and their confidence increases. Loss of home equity, stricter FHA guidelines, and increased FHA MI premiums don’t bode well for inspiring borrower confidence in taking out FHA home loans.

Changing Economy Requires Innovative Home Loans

It’s worthwhile to compare the times when homeowners could reasonably expect to get and keep a job for many years; moving up in company ranks provided comfortable raises and eventually led to retirement with a company pension. Today, we cannot count on any aspect of financial security, let alone secure retirement. With layoffs, downsizing, reduced benefits, and disappearing investments, it’s not surprising that fewer Americans feel comfortable committing to 30 year mortgage loans.

The challenge for FHA is creating home loan programs that mirror the changing economy and meet the needs of borrowers facing increasing levels of financial uncertainty.

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