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FHA loans emerge from the sidelines

WASHINGTON – June 10, 2008 – For the past few months, the Federal Housing Administration (FHA) has backed nearly every loan that Laura Triplett has closed for customers at SunTrust Mortgage.

“I’ve got another 20 people closing in June and most of them got FHA loans, too,” said Triplett, a branch manager. “I don’t know what we’d be doing without FHA.”

Demand for these once-neglected mortgages has surged because they do not require the hefty down payments or stellar credit scores that lenders have come to expect from borrowers. In addition, the amount of money people can borrow on these loans went up dramatically this year, and many homeowners have found them attractive for refinancing.

They might not be the cheapest loans around, but they are the best fit for some borrowers – and the only option for others – as lenders continue to toughen their standards in response to the sub prime meltdown.

The number of FHA loans issued shot up 126 percent in the first quarter, compared with the same time a year ago, even though they still make up a small part of the market. They have made the biggest gains in pricey areas such as Washington, where the down payment other loans require is out of reach for many borrowers.

David H. Stevens, president of Long & Foster’s affiliated businesses, said his real estate brokerage now holds regular FHA training sessions for its agents and the loan officers at its in-house lender, Prosperity Mortgage.

“Our FHA business in the Washington area went from virtually nothing at the end of 2007 to about 30 percent today,” Stevens said. “In some spots, FHA makes up 50 percent of all our loans.”

The volume of loans at Wells Fargo, one of the nation’s largest lenders, has increased 342 percent this year from the same time in 2007, said Greg Gwizdz, the company’s national retail service manager. Helping drum up business were live simulcasts for real estate agents that the lender recently held in movie theaters nationwide touting the benefits of FHA loans.

Many attribute FHA’s growth spurt in part to federal legislation that has temporarily raised the FHA loan limits nationwide, broadening the number of people who can use these loans. In most parts of this region, the limit is now capped at $729,750, up from $362,790.

The change, which took effect in early March, came just in time for Abby and Walter Morris.

The couple had made an offer on a house in Chevy Chase. But their lender yanked the loan at the last minute, citing concerns about their finances, the couple said.

Abby Morris, a doctor, had just completed her residency. Her earning potential was huge, but her medical school loans and her lack of long-term employment made the lender squeamish.

“We didn’t have a stash of money in the bank or stocks to cash out,” Abby Morris said. “We were depending on our income potential and our history of on-time payments to help us qualify for a loan.”

When that didn’t happen, the couple planned to withdraw their offer until Kerry White, a loan officer at Prosperity Mortgage in the District, told them about the new FHA loan limits.

“A year ago, this couple would have had no problems getting financing,” White said. “But because of the tightening mortgage climate, their loan options dried up. … FHA became an obvious alternative.”

The FHA does not lend money directly. It provides mortgage insurance to borrowers through private lenders. That means the FHA will pick up the tab for defaulted loans using premiums it collects from all of its borrowers.

The agency lost relevance when home prices soared and borrowers turned to subprime loans with lower upfront costs. When those loans started defaulting at an alarming rate, many subprime lenders shut down and the FHA started slowly regaining its footing. Its market share is now about 10 percent, up from 2 percent in 2005, according to Inside Mortgage Finance, a trade publication.

Most of FHA’s business now comes from refinancing. During the first three months of this year, nearly 60 percent of the 15,000 loans that FHA insured in Maryland and Virginia were for borrowers who were refinancing, federal data show. Some of them turned to FHA to get out of loans that were becoming too much to handle.

Among them was Petrina Chesson, who was anxious to get rid of a burdensome subprime adjustable rate loan. She got that mortgage two years ago and pulled out cash for improvements on her D.C. townhouse.

But the loan’s interest rate reset last month, and her monthly payments climbed to $3,497 from $3,069. Chesson never fell behind on her mortgage but feared she would.

“Things were getting tight, and I was getting worried,” Chesson said. “I just wanted a 30-year fixed loan, and no one would give it to me until Bank of America helped.”

Her new loan will consolidate her other debts so that her total monthly payments will be $3,290. Her mortgage makes up $3,002 of that total.

Although the FHA is starting to recapture borrowers it lost to subprime lenders, its loans do not have the features that drew borrowers to subprime loans but later turned problematic.

Only borrowers who can make at least a 3 percent down payment or have at least 3 percent equity in their homes and who can document their income can qualify for FHA loans.

By contrast, many subprime loans did not require down payments or verification of income. They also charged expensive prepayment penalties that made it tough for borrowers to refinance. FHA loans do not allow such fees. Most FHA loans have fixed interest rates; subprime ones typically have rates that can rise.

Douglas Vazquez, 30, knew none of that when he applied for an FHA loan. “I was more like, ‘FHA? What’s that?’ “ Vazquez said.

All he knew is that he could not afford the 10 to 20 percent down payment many lenders demanded as he shopped for a condo, nor could he qualify for a loan without a co-signer.

An FHA loan worked for him because of the low down payment and because it let his mother, a non-occupant, sign on his loan, something many conventional loans do not allow.

The paperwork was a hassle, said Vazquez, who purchased a D.C. condo for about $400,000. “They required pay stubs from both of my jobs. They required statements from checking accounts. They wanted tax returns. They would call my employers . . .. They called my mother,” Vasquez said. “But it was worth it.”

These glowing reviews stand in sharp contrast to past criticism of the FHA, which was previously bashed by lenders and borrowers alike as too cumbersome. Now, complaints center on whether the agency can handle its growing workload.

Guy Cecala, publisher of Inside Mortgage Finance, said the FHA remains bureaucratic. “But if your choice is vanilla ice cream or no ice cream, vanilla starts looking good.”

Source: washingtonpost.com