FHA Commissioner: More Private Capital Needed in Mortgage Lending

by Karen Lawson
May 26th, 2010
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FHA commissioner David H Stevens believes that the lack of private capital in the US housing industry indicates a “very sick system.” FHA is the predominant source of mortgage loans for low and moderate income families; Stevens thinks it’s time for private mortgage lenders to provide more mortgage loans to those without a 20% down payment. Stevens characterizes the 20% down payment as an obstacle keeping  private capital from flowing back into the housing markets. Unwilling to risk losses on mortgage loans with less than a 20% down payment, private lenders are all but leaving the niche for low and moderate income buyers and homeowners to FHA.

Mortgage Loans: The Times (and the Economy) are Changing

For years, the 30 year fixed rate mortgage loan provided a stable and affordable method for buying a home or seeking a mortgage refinance. With many borrowers taking advantage of today’s low mortgage rates for refinancing to fixed rate mortgages, others may be left on the sidelines. Today’s typical conventional home loan generally requires a minimum down payment of 20% and good to excellent credit. Borrowers with less than great credit and less cash for a down payment may find an FHA mortgage loan their only option. In view of changing economic conditions, traditional lending guidelines may no longer meet the needs of moderate income buyers with fair to good credit scores. Factors including unemployment, volatile financial markets, and loss of income have caused many individuals to lose their savings and favorable credit standing. Higher living expenses,health care, and education costs coupled with diminishing returns on savings and investments are making it more challenging for otherwise qualified borrowers to save 20% down.

It’s time to consider new ideas for mortgage lending, and that doesn’t mean loosening all lending requirements and giving away the store. If the sub-prime crisis taught us anything, it’s that responsible lending doesn’t involve having people sign mortgage papers and filling in the blanks later. Mortgage fraud and lax lending practices by FHA lenders lead to additional FHA oversight and regulation, and increase FHA risk for losses associated with mortgage defaults.

FHA Shouldn’t be Lending to Everybody and Their Brother

Although FHA functions as the residential housing finance arm of the US Department of Housing and Urban Development, the agency was never intended to take over the low to moderate income home loan market. Without involvement from private lenders, FHA may be absorbing too much risk while gaining influence in communities and the mortgage lending industry. A balance of private enterprise and government participation is necessary for addressing concerns about FHA exposure and influence in US mortgage lending.

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