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Welcome to FHA Mortgage Guide.

We take long-term mortgages for granted today, but it wasn't always that way. Long ago it was likely that if you financed a home you borrowed money with a five-year "term" mortgage -- and even then you needed 50 percent down. FHA's have changed dramatically, learn why! FHALoanPros.com is devoted to providing useful information about FHA Loans, but please note that neither FHALoanPros.com nor any of the products advertised on FHALoanPros.com are affiliated with or endorsed by the U.S. Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA), or other US Government department or agency.

FHA loan limits returning to lower levels

Peter G. Miller
July 8th, 2011

The Federal Housing Authority (FHA) is gradually returning to the comfy loan limits of old.

As of Oct. 1, 2011 FHA guidelines will be changed and maximum loan sizes will be reduced. The term “reduced” should not frighten anyone; available loan amounts will still be far above the financing levels required by most FHA borrowers.

Lowering FHA Loan limits

Under the new rules, the maximum FHA loan size will be reduced from $729,750 to $625,500 in high cost areas in the lower 48 states. As recently as 2006 the comparable FHA loan limit was $362,790.
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FHA ending Hope for Homeowners program

Peter G. Miller
July 5th, 2011

The Federal Housing Authority (FHA) is ending the Hope for Homeowners (H4H) program and not too soon.

The essential idea behind the H4H effort was to help underwater homeowners refinance toxic loans into FHA mortgages. Sounds good–at first–but in fact the program was doomed from the day it started in 2008.

To participate in H4H you must have a borrower who needs help and a lender willing to reduce the principal balance of the loan. Since lenders have little interest in reducing principal balances, you can image that few Hope for Homeowner loans were written. As to borrowers, they had to be refinancing a prime residence and could not own a second home or investment property. The borrowers must need help because their loan payments have shot up and represent more than 31 percent of their monthly income.

But the program also contained some unusual provisions.
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Changes in FHA loan limits to impact few borrowers

Peter G. Miller
June 20th, 2011

The FHA loan limit will fall as of Oct. 1, 2011, an event which has set off concerns that Federal Housing Authority (FHA) mortgages will be unavailable to lots of borrowers.

Down and out for high loan limits

Such worries are grossly overblown. Here’s why:

The FHA loan limits–as well as conventional loan limits–were increased on a “temporary” basis in 2008. Under the new rules the top FHA and conventional loan limits were the same–$729,750. Also, the FHA loan limit in most areas in the contiguous 48 states was set at 125 percent of the median house price. (There were higher FHA loan limits in Alaska, Guam, Hawaii, and the Virgin Islands and the reverse mortgage limit was $625,500.)

You can see how the 2008 standards caused problems.

First, if the FHA and conventional loan limits are the same in high cost areas it means that loan products could be compared straight up without an artificial limit as to the size of FHA mortgages. In other words, there could be open competition for borrowers.

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June 15th, 2011

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There is a serious movement on Capitol Hill to raise the Federal Housing Authority (FHA) downpayment to 5 percent. Now some might think, “Aha, this is a good idea because it will make the FHA mortgage program more secure.” The catch is that if you look at the pros and cons it quickly becomes apparent that the pros are non

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Cons of increasing FHA downpayments

“NAR strongly opposes increasing the downpayment for FHA,” says Ron Phipps, president of the National Association of Realtors. “The correlation between downpayment and loan performance is significantly less important than the linkage to strong underwriting, which FHA continues to have. FHA’s foreclosure rate remains less than conventional mortgages, so we don’t believe changes to the downpayment would do anything but disenfranchise many creditworthy homebuyers.”

HUD, itself, has said that an increase in the required downpayment would do just about nothing to improve the FHA mortgage program–and a lot to hurt it.
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Can your pregnancy affect your ability to get an FHA mortgage?

Peter G. Miller
June 10th, 2011

Housing and Urban Development (HUD) is now involved in several situations where it claims that pregnant borrowers were denied housing under the Fair Housing Act. This is important because such decisions can impact individuals who are now or might become pregnant, as well as their families and household members.

The Fair Housing Act and pregnancy

In basic terms, the Fair Housing Act says that individuals may not be denied a home, rental or mortgage because of their race, color, national origin, religion, sex, familial status

or handicap. Additional laws at the federal and state level can protect against discrimination on the basis of other factors such as age and sexual orientation.

Within the meaning of familial status, says John Trasviña, HUD Assistant Secretary for Fair Housing and Equal Opportunity, “pregnancy is not a basis to deny or delay a loan. It’s just that simple. Mortgage professionals may verify income and other resources and have eligibility standards but they may not single out women on maternity leave to deny or delay loans that they are otherwise eligible for.”

The policy would also apply to men who are on parental leave due to the birth or adoption of a child, says HUD.
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Will the FHA downpayments increase?

Peter G. Miller
June 6th, 2011

There’s a lot of rumbling in Washington suggesting that an effort is now underway to raise the Federal Housing Authority (FHA) down payment requirement from 3.5 percent to 5 percent.

This is an inherently bad idea–and not unexpected.

Will your FHA mortgage cost you more?

“Research has shown that requiring a higher down payment does little to reduce risk of default but causes home buyers to use more of their reserves for the down payment,” said Barry Rutenberg, speaking for the National Association of Home Builders. “Sound underwriting is the key to minimizing foreclosures and defaults, not higher down payments. This is demonstrated by current FHA foreclosure reports on loans made to borrowers with sound credit profiles, which have significantly improved.”
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Strange accounting suggests FHA loss

Peter G. Miller
June 2nd, 2011

In the game of scoring political points one need look no further than a new report issued by the Congressional Budget Office (CBO) to see theory differ from reality. According to Accounting for FHA’s Single-Family Mortgage Insurance Program on a Fair-Value Basis, the Federal Housing Authority (FHA) could be a big cost to the government.

FHA’s real cost

This, in fact, is not the case. It could be the case if we use an absurd form of accounting. In other words, elephants can’t fly but if we change physics enough than in theory that would be a real worry.

“The costs of FHA’s single-family mortgage insurance program are recorded in the federal budget using a methodology spelled out in the Federal Credit Reform Act of 1990 (FCRA),” says the CBO. “This analysis examines the budgetary impact of using a different accounting approach–fair-value estimating–which provides a more comprehensive measure of the cost of that program.”

So what’s the difference? There are several points:
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Brokers increasingly support FHA program

Peter G. Miller
May 28th, 2011

Existing home sales were down in April according to the National Association of Realtors

(NAR), but what was most interesting about the NAR announcement was a very pointed claim regarding the FHA.

“Our data shows only one out of five first-time buyers needing a mortgage could afford a 20 percent down payment, and without first-time buyers the trade-up market would stall with very negative consequences for housing and the overall economy,” said NAR president Ron Phipps. “Ironically, low down payment FHA and VA loans, which are so critical to this segment, have performed well and never needed a taxpayer bailout because those borrowers stayed well within their budgets.”

Indeed, NAR consumer survey data tells us that 56 percent of entry level buyers in the past year financed with an FHA loan.

This is the second time NAR has recently mentioned that the FHA program is not taxpayer supported. In April NAR chief economist Lawrence Yun noted that “given that FHA and VA government-backed loan programs turned a modest profit over to the U.S. Treasury last year, and have never required a taxpayer bailout, we believe low down payment loans should continue to be available for those consumers who have demonstrated financial responsibility and are willing to stay well within their budget.”
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Peter G. Miller
May 23rd, 2011

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low FHA loan rates with stagnant prices and large inventories and the opportunities in some markets have become interesting.

As of February, the FHA held title to 68,801 homes. These are homes financed with FHA mortgages that were then foreclosed. The number is up substantially from 39,998 properties held by the government in October 2010, according to HUD.

FHA critics cite the number of homes FHA holds title on as evidence that the program is somehow failing and should end. This is nonsense.

Inside the numbers

Overall, HUD has 6,933,260 insured home mortgages outstanding as well as 530,930 insured reverse mortgages outstanding. That’s 7,464,190 loans. In other words, fewer than 1 percent of the loans insured by HUD have wound up in government inventories. Given the down market we have faced since the April 2007 peak, it’s amazing that the numbers are not worse.

Critics feel that FHA loans are somehow “iffy” because they only require 3.5 percent down. The down payment requirement is not much of an issue. If it were, then surely a lot more homes would be held by the government.

Falling Prices

The problem is falling prices, which left many home buyers with few options in a down economy.

Consider:

Mr. Smith buys a home for $250,000 in April 2007. The property is financed with an FHA-insured loan for $241,250. In 2011, Mr. Smith loses his job and is foreclosed. According to the Federal Housing Financing Agency (FHFA), home values have declined by an average of 18.6 percent nationwide since April 2007. As a result, the Smith property is now worth $203,500. Even if Smith put down 15 percent, there would have been a loss.

Rising Prices

Now, imagine if home prices had simply risen by the rate of inflation over the past four years. Mr. Smith’s property would now be worth $271,177.57. That’s more than $30,000 above the outstanding balance for the FHA loan. (The loan balance at 6 percent would be 228,257.34 after four years.)

In a market with rising prices, it would be easier to sell a distressed home. In fact, the term “rising prices” suggests more demand in the marketplace and thus more homes would sell at auction and fewer properties would wind up in the HUD inventory.

The growing number HUD properties are not evidence of a FHA loan program gone bad. Rather they are evidence of a marketplace that’s been undermined. Like everyone else, HUD is a victim.

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FHA offers help to Mississippi flood victims

Peter G. Miller
May 18th, 2011

For millions of people along the Mississippi River, times have gotten tough. The Big Muddy has crested at near-record levels. The damage is substantial, but the U.S. Department of Housing and Urban Development (HUD) is making moves to provide emergency assistance to homeowners who find themselves underwater.

“Families who may have been forced from their homes need to know that help is available to begin the rebuilding process,” said HUD Secretary Shaun Donovan. “Whether it’s foreclosure relief for FHA-insured families or helping these counties to recover, HUD stands ready to help in any way we can.”

HUD says lenders must suspend initiation of foreclosures and foreclosures in process for 90 days from May 12, which was the date President Barack Obama declared Mississippi River flooding a disaster.

Special protections for those who are current on their mortgage but now face flood-related financial problems are also in the offing. HUD is recommending mortgage lenders consider mortgage modifications, refinancing, waiver of late charges and Special Forbearance Agreements (SFA).

Special forbearance

According to HUD, SFA agreements provide:

  1. Reinstatement of loans at least 3 months but not more than 12 months delinquent
  2. More relief than informal or formal forbearance plans
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  4. Failure options
  5. No maximum terms

FHA-approved lenders are eligible for 100 percent financing, including closing costs when they participate in .

Additional help

Disaster financing “enables those who have lost their homes to finance the purchase or refinance of a house along with its repair through a single mortgage, HUD said. FHA-approved lenders are eligible for 100 percent financing, including closing costs.

Are you wondering where to start? If you’re in a Presidentially-declared disaster area you can get help with your FHA home loan. Contact your lender or servicer to start the process or FEMA, which can be reached toll-free at (800) 621-3362 or TTY (800) 462-7585.

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House bills would hurt FHA borrowers

Peter G. Miller
May 13th, 2011

Given the substantial drop in home prices seen during the past few years it’s not surprising that the Federal Housing Authority (FHA) program now finds itself with an enlarged supply of foreclosed properties. A new report from HUD shows that as of February the FHA now holds title to 68,801 foreclosed homes. That’s a big number, far higher than the 44,605 properties it held a year earlier.

The growing total of so-called REOs–”real estate owned” by a lender or insurer–suggests that home prices are unlikely to turn around anytime soon, especially in the most hard-hit foreclosure areas. The REO numbers have risen at the very time several bills have passed the House of Representatives which would end current foreclosure prevention programs.

For instance, H.R. 839, the HAMP Termination Act, would end the Making Home Affordable program. To date this program has prevented 586,916 foreclosures. The proposed legislation passed the House by a vote of 252 to 170.

Or, how about HR 836, the Emergency Mortgage Relief Program Termination Act. This legislation would end mortgage assistance for the unemployed. The House vote was 242 to 177 in favor.

The reality is that these bills will never pass the Senate and will be vetoed by the President. They are, in effect, a way to make a statement. So what statement do they make?

Modifications

Loan modification and foreclosure prevention programs have hardly been perfect. The Making Home Affordable program, as an example, not only helped almost 590,000 owners avoid foreclosure, it also failed to help more than 750,000 owners who entered the program but could not successfully complete the three-month trial period.

The catch is that cutting off help to citizens in need, even with programs that are not perfectly successful, ultimately hurts the FHA program. Consider what the FHA does: It’s an insurance program. Individuals who cannot buy with 20 percent down can buy with 3.5 percent percent down under FHA guidelines, if they meet FHA loan requirements.

When a lender makes an FHA loan it has 100 percent protection against losses. The reason is that in the event of default FHA insurance kicks in to protect the investor. The money paid to lenders comes from the premiums collected from FHA borrowers. There is no cost to the taxpayer.

So, if we cut loan modification programs we will increase the number of homes that go to foreclosure. This will help push down local home prices. The more homes are underwater the bigger the individual claims against the FHA. If it ever happened that the House termination bills became law then home prices would fall further (because the supply of foreclosed homes would increase) and FHA mortgage rates would rise (because all mortgages would be seen as more risky). None of this is good for the housing market.

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HUD ends limit On FHA loan fees

Peter G. Miller
May 8th, 2011

In the ongoing effort to make the FHA loans less attractive, HUD has now removed the lender fee cap from FHA reverse mortgages and the 203(k) financing, loans used to acquire and improve homes.

To understand how this works we need to go back to December 30, 2009. If you think about that date you will quickly realize that, gee, December 30th, that’s the very end of the year, the day before New Year’s Eve, part of the week between Christmas and New Year’s Day, a time when a lot of folks are on vacation, an excellent time to change FHA loan requirements in a way which will draw the least possible attention.

So what did the FHA do? It gave billions of dollars

to the nation’s lenders, a transfer from borrowers to lenders because–after all–FHA borrowers are just loaded with cash.

As a result of regulatory changes, said HUD in 2009, the “FHA no longer limits the origination fee to 1 percent of the mortgage amount for its standard mortgage insurance programs. However, both Home Equity Conversion Mortgage (HECM) and Section 203(k) Rehabilitation Mortgage Insurance Programs retain their statutory origination fee caps.”

Get it? There was a cap on lender fees when making FHA loans. That cap was eliminated in 2009–except for those pesky reverse mortgages and fix-up loans. Now, in 2011, HUD has gone back and gotten rid of the lender fee limitations on those loans as well.

Now you might think that HUD is allowing lenders to run wild, to charge whatever fees they like for FHA mortgages. And while the rules actually do allow unlimited fees–either you have a cap on fees or you don’t have a cap–HUD apparently thinks that moral suasion will impact lenders.

As it explained in 2009, HUD, “expects that lenders will continue to charge fair and reasonable fees for all origination services and the agency will continue to monitor to ensure that FHA borrowers are not overcharged. Furthermore, the FHA Commissioner retains the authority to set limits on the amount of any fees that mortgagees charge borrowers for obtaining an FHA loan and the agency does intend to issue additional guidance on the subject.”

Honest. HUD really expects that lenders will do nothing other than charge fair and reasonable fees.

Exactly what experience has HUD had that would lead them to this expectation?

In its 2010 Annual Management Report, HUD explained that “we suspended some well-known FHA approved lenders, withdrew FHA approval from over 1,500 others, and imposed over $4.27 million in civil money penalties and administrative payments on non-compliant lenders. We are sending a clear message that FHA will not do business with lenders who do not operate ethically and transparently, and are holding lenders accountable by publicly reporting lender performance rankings.”

But charging loan fees greater than 1 percent is entirely allowable. It makes FHA loans less desirable and it makes borrowers poorer. Charging steeper fees is not a transgression of any sort because now lender loan fees are entirely unlimited. There is no definition of the term “fair and reasonable.”

So, since the FHA has the authority to set fee limits, why not do that? It’s a system that worked well for decades, few lenders refused to make FHA loans and it didn’t take a stadium filled with lawyers to debate the meaning of fair and reasonable.

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Should There Be A 15-Year Pay-Off For FHA Reverse Mortgages?

Peter G. Miller
May 3rd, 2011

It used to be that FHA mortgages were as clear and understandable as possible, but then back in 2008 the Bush Administration began to fiddle with the FHA reverse mortgage product and now a new controversy has emerged.

The traditional understanding of an FHA-insured reverse mortgage was that it was a huge, negatively-amortizing mortgage. The owner–who had to be at least age 62–got financing on the basis of the property’s value and not income or credit. The FHA insured such mortgages because the loan amount was always far less than the appraised value of the property.

But what if the owner died, moved or sold the property? The rule was that the FHA reverse mortgage was to be repaid from the sale or refinancing of the property–that there would be NO claim against the estate or the heirs.

In 2008 HUD tried to re-write the rulebook with Mortgagee Letter 8-38. “The HECM is a “non-recourse loan,” said HUD. “This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt.”

“Some program participants mistakenly infer from this language that a borrower (or the borrower’s estate) could pay off the loan balance of a HECM for the lesser of the mortgage balance or the appraised value of the property while retaining ownership of the home. This is not correct and is not the intended meaning of the quoted provision. Non-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure.”

Well, no, there was nothing mistakenly inferred. If heirs or a surviving spouse refinanced the house for the full amount of the property’s current value–and the value was now less than the loan amount–that was all that could be owed. Any shortfall would have to made up by the insurance provider, meaning HUD.

AARP sued HUD in an effort to return to the old interpretation. And, HUD agreed rather than take the matter to court.

Now there’s a new twist, one that could again change the game.

90 Days No More

Usually there’s a 90-day period to settle a reverse mortgage after the borrower dies, sells or moves, but under a proposed Texas bill, HB 2410, heirs would have the right to repay the debt over 15 years.

If this legislation were to pass–and if the concept spreads to other states–the reverse mortgage program would end. The reason is that reverse mortgage lenders are not interested in making longer term loans. Statistically, about half of all reverse mortgages end within six years. That means lenders can count on getting much of their investment back within a particular amount of time and then re-invest elsewhere if they like. It also means that HUD has a very good idea of how much might be owed in the event of a claim.

You understand what the authors of the Texas bill are trying to do, but it’s an idea which should be added to the FHA loan program, should apply only to new loans and should not imposed by the states. In this way there would be better balance betwee the interests of borrowers and the interests of lenders.

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FHA PowerSaver Mortgage Now Available

Peter G. Miller
April 28th, 2011

HUD is out with a newly-minted FHA loan, the PowerSaver, and it’s a program that represents better than half a good idea.

Under the PowerSaver program as many as 30,000 homeowners will be able to borrow up to $25,000 for selected energy-efficient home improvements. The loans can be outstanding for as long as 20 years and interest rates are expected to range from 5 to 7 percent. Eligible improvements under FHA guidelines include such things as insulation, duct sealing, energy efficient doors and windows, energy efficient HVAC systems and water heaters, solar panels and geothermal systems.

“PowerSaver loans,” said HUD, “will only be available to homeowners who have the wherewithal and motivation to make energy improvements to their home. Borrowers must have credit scores of at least 660 and their total debt to income ratios cannot exceed 45 percent. The combined loan-to-value ratio for all loans on a home, including the PowerSaver loan, cannot exceed 100 percent.”

Ah, and there we have a problem.

You can understand that HUD is justified in wanting a 660 credit score–not a big deal given that typical FHA borrowers now have credit scores of 703. And you can easily understand the 45 percent LTV, a back ratio that includes both housing costs and recurring monthly debts. This is 2 percent more than the standard FHA back ratio of 43 percent, but a standard justified by the energy savings which should be produced from the improvements financed under the PowerSaver plan.

But–and this is a big one–there is the business of that loan-to-value ratio.

HUD is entirely right in not wanting to make loans which exceed the value of the property. That makes sense. HUD would actually be more right if it said the loan-to-value ratio of all financing was less than the value of the property.

The catch is that in today’s world huge numbers of properties are underwater. The value of the property is less than the mortgage balance. Especially in the nation’s foreclosure centers–such states as California, Florida, Nevada, Arizona, Michigan, Georgia, Ohio, Illinois and Texas according to RealtyTrac–the PowerSaver program is a non-starter.

These are precisely the areas where help is needed to raise home values. It would be terrific if homeowners were able to increase property prices by making their homes more attractive in the marketplace through lower energy costs and higher environmental standards.

You can’t blame HUD. FHA mortgage financing is an insurance program and HUD, being financially sensible, cannot be in the position of starting a program which is destined to produce large numbers of claims.

And there is the conflict. The PowerSaver program is a very good idea. In a perfect world one could argue that the entire housing stock should be retro-fitted so there’s less need for energy, less demand to build new electrical generating stations. If the economy was in better shape the PowerSaver program could be enormously popular, but the reality is that while 30,000 PowerSaver loans–the number expected to be initially insured–are a good idea we won’t get a chance to see the economic and environmental impact that several million PowerSaver mortgages would make.

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FHA Losing Market Share

Peter G. Miller
April 23rd, 2011

FHA officials should be elated. Their stated goal to surrender mortgage originations to the private sector is coming true.

Yippee!

Oh wait, no yippees quite yet. Having a weaker FHA does not benefit borrowers.

The latest figures from HUD show that FHA applications for March were down 35.7 percent. Endorsements–loans actually made–were off 25.1 percent.

The National Association of Realtors reported that 4.25 million existing homes were sold in February, down a touch from 4.37 million units in February 2010.

So how does this happen? You can understand that FHA originations might rise of fall, but why is the fall so significant at a time when the real estate marketplace is stagnant.

This is not a minor manner. HUD Secretary Shaun Donovan told Congress recently that “over the last two years, FHA has helped over 2 million families buy a home – 80 percent of whom were first-time buyers. FHA also has helped nearly 1.5 million existing homeowners refinance into stable, affordable products, with monthly savings exceeding $100 in most cases. FHA financing was used by 38 percent of all homebuyers, insuring, along with the VA and federal farm programs, 81 percent of all loans to African Americans and 73 percent to Hispanics in 2009. But FHA is also a vital resource for homeowners facing foreclosure. FHA’s loss mitigation program minimizes the risk that financially struggling borrowers go into foreclosure. Since the start of the mortgage crisis, it has helped more than half a million homeowners.”

The Private Sector

“It is critical, however, that we pave the way toward a robust private mortgage market,” said Donovan, who then added:

“Taking steps to bring private capital back is a process that HUD began many months ago – and I want to thank you for passing legislation in the last Congress to provide more flexibility to FHA’s mortgage insurance premium structure. With this authority, FHA announced a premium increase of 25 basis points last month.”

Well, okay, this is the smoking gun which explains why FHA annual insurance rates are rising. Borrower costs are not being increased because of losses to reserve funds, delinquencies or foreclosures, they’re being raised so that the FHA program will be less attractive, thus pressuring borrowers to use loan products from the private sector.

Was private capital ever missing from the FHA program? Not at all. There has been no problem getting FHA loans during the past several years while the private sector survived only because of massive taxpayer loans and the ability to borrow from the federal government at near zero percent.

Still, even with a shift toward the private sector, there is no justification for the FHA to openly cede market share to the private sector. Instead, private lenders ought to be more competitive and come up with better and cheaper mortgages.

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