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FHA mortgages continue to gain market share

by Peter G. Miller
December 22nd, 2010

Given that the mortgage mess is now better than three years old you might expect that FHA loan activity might begin to slow and represent less market share. In fact — and oddly — that is not the case according to a new report from HUD.

Some of the numbers reported by HUD include:

___ For home purchase loans, the FHA’s share of the number of new mortgage
loans was 42.3 percent, up from 33.7 percent from the previous quarter and 28.6 percent a year earlier.

___The FHA’s dollar volume share of the mortgage market was 18.9 percent, up
from 16.2 percent in the first quarter and 16.8 percent a year earlier.

___ For home purchase loans, the FHA’s dollar volume share was 36.3 percent, up from 29.2 percent in first quarter and 24.5 percent a year earlier.

___ Based on the number of loans originated, the FHA’s share of the mortgage market was 22.7 percent, up from 19.2 percent in the previous quarter and
19.5 percent a year earlier.

Huh? How can this be?

There’s a “lagging indicator” in here and it has nothing to down with FHA guidelines, interest rates or prepayment penalties.

Lenders, for their part, have universally shifted to traditional loan products and underwriting standards. They would be nuts not to do so. The reason is that the Dodd-Frank Wall Street Reform and Consumer Protection Act says lenders can find a safe harbor from borrower lawsuits if they will simply offer qualified residential mortgages.

In basic terms, a qualified residential mortgage is an FHA, VA or conventional loan underwritten with a fully-documented loan application. Points and fees are limited to 3 percent of the loan amount.

If you’re a borrower these mortgages are well within the range of reason, the only remaining need is to find the best available rate and a lender who can deliver promised terms. By getting a good-faith estimate (GFE) you can be fairly sure that what has been promised will be produced.

Why then do borrowers seek FHA loans with increasing frequency?

There are, I think, several reasons.

First, the FHA financing program is well-known, standardized, nationwide and reliable. No one has ever gotten a toxic FHA loan or an FHA loan with a prepayment penalty. Word gets out.

Second, among qualified residential mortgages the FHA loan is a very good choice for those with less than 20 percent down or who lack qualified VA service.

Third, borrowers have memories. They read. They look around and see the incredible damage caused by the mortgage mess and they want a loan program which represents both safety and security so they turn to FHA-insured mortgages. In effect, lenders in general are paying a price for the “nontraditional” loan products offered in the past few years.

In time, FHA market share will decline — but not until recent memories fade.

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