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FHA Market Share Increases

by Peter G. Miller
September 1st, 2010

If you’re looking for a sign that real estate markets are beginning to rebound you certainly won’t find it in the July sale figures.

The National Association of Realtors reports that existing-home sales in July dropped 27.2 percent from the June, a decline of notable size.

“Sales,” says NAR, “are at the lowest level since the total existing-home sales series launched in 1999, and single family sales — accounting for the bulk of transactions — are at the lowest level since May of 1995.”

NAR also reported that the median existing single-family home price was $183,400 in July, 0.9 percent above a year ago.

Given such dour and dire results for the month, what about FHA loans?

Official HUD figures tell us that 144,514 FHA mortgages were approved during July, down 4.2 percent from the month before and 26.9 percent from a year earlier.

In other words, we will soon see reports which show that FHA market share grew in July. Why? Because FHA loan volume is off far less than unit sale activity.

Importance

The numbers from July tell us that the housing market remains fundamentally weak. This is a by-product of high unemployment rates, the remaining toxic loans from 2005, 2006 and 2007 which have not yet been refinanced or foreclosed and the end of the first-time home buyer tax credit.

Alternatively, the FHA program remains sensible and stable. You put down 3.5 percent and buy insurance to cover the lack of a larger down payment. There are no prepayment fees, no hidden charges, no balloon payments and no loopy penalties.

For the mortgage industry the FHA program represents a problem. All those things the FHA does not allow are a source of revenue and profits for private-sector lenders who offer such, er, “features.” Between the FHA loan program, VA mortgages and conventional loans we’re beginning to see far fewer loans with predatory features.

All of which brings us to the point of why the FHA is necessary. It sets an example which lenders in the private sector can ignore — if they like. There’s no requirement for lenders to offer FHA mortgages or to follow FHA loan guidelines. In fact, many lenders do not even qualify to offer FHA financing.

The catch, of course, is that the public isn’t stupid. People understand that a mortgage is a big deal and that little changes here and there can mean big profits for lenders — and huge and unnecessary costs for borrowers.

The view here is that FHA market share will stay where it is or actually increase in the near future. Why? The FHA program has been with us for 75 years, millions of people have been helped, not one of them paid a prepayment penalty and no one faced a balloon payment. And people don’t forget when they have been well-treated.

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