Subprime Blowup Boosts FHA Backers

But housing price numbers do not support any increase in FHA loan limits, two HUD officials said Tuesday.

Some of the changes FHA is hoping to make depend on passage of the FHA Modernization Act, according to Judith Heaney, supervisory operations officer in HUD’s Chicago regional office, and Charles Gardner, director of HUD’s Atlanta Homeownership Center. The bill was approved by the House but failed to garner support in the Senate.

But times are different now, the pair pointed out at the 17th annual Midwest Lending Conference of the Illinois Mortgage Bankers Association and Illinois Association of Mortgage Brokers.

“The atmosphere has dramatically changed,” said Gardner, who is responsible for all FHA single-family programs in the southern states plus Indiana and Illinois. “What we didn’t have [last time] was the complete blow-up of the subprime market. That [blow-up] suggests to me that there may be even more interest in FHA modernization. There are very few options available to borrowers whose credit is impaired so I think there is more support for making sure FHA is available. There seems to be bi-partisan support for FHA modernization.”

“I think the time is right,” said Heaney, who has been with HUD for 38 years. “If there was ever a wind at our back, it’s now with the events of the last 30-45 days on the hill with subprime and the intention of Congress. We now have all this publicity about needing good products that are stable and fairly priced.

“I think we really have momentum now,” she declared. “Everybody is so excited they keep tripping over each other trying to decide how they can best help the cause. The odds of this going through in some version are very, very high because the impetus is there; and the will is there; and the political interest is there. That’s what drives legislation. This is very topical right now. It’s being looked to as salvation for a lot of people who have gone in the wrong direction.”

Current market conditions also are showing signs of a revival of interest and participation in FHA mortgage programs by borrowers, according to Gardner, although Heaney admitted that the origination of FHA loans in the 19-county Chicago area, once in the 3,000 to 4,000 a month range, is now at a historical low of 1,000 a month.

FHA had fallen out of favor, Gardner admitted, but said that but in the past month he had more calls than in the previous two years from Realtor, broker and lender groups that are interested in FHA programs and want to arrange presentations.

“The times are changing and there’s a recognition that FHA may be one of the few options left for anyone who might otherwise be left out of the market with the structural changes in the subprime market,” he said. “We’re already seeing a tremendous increase in the number of refinance loans going from conventional to FHA. Nationally 67 percent of refinances are going to FHA.”

Gardner said that although there has been 14 percent growth in the 203K program, which provides mortgage loans with additional funds for home improvements, FHA is reviewing that program with the aim of making it more acceptable. One change under consideration, he said, is again opening the program to investor participation.

“I can’t tell you when a decision will be made,” he said, “but we are actively reviewing that option. We had few problems in the past with investors because they had experience.”

Most problems involved non-profits because they lacked that experience, he pointed out.

Also getting a close look are seller-assisted down payments, Gardner explained.

“There is a potential problem with seller-assisted down payments in a flat market,” he said, noting that seller-assisted down payments often result in higher home purchase prices. “Then when borrowers want to refinance in one and a half years, they can’t refinance because the value is not there. They don’t have equity. It happens over and over again.

“We look at seller-assisted loans all the time,” he explained, “and seller-assisted loans do not perform as well.”

One of HUD’s “biggest challenges” today is finding ways to fill in the gaps between current home values and outstanding loan amounts, Gardner said, noting, “We have many mortgages out there that cannot be supported by current values.”

Heaney said that HUD is “trying to revamp the entire condo program and do away with all these unnecessary provisions.” And Gardner said that HUD also wants to simplify the down payment calculation for FHA loans. “That would make things a lot easier,” he said. “But that would require legislation,” he noted, pointing out that this would include down payments of less than 3%.

Heaney said she saw little hope for any immediate increase in FHA loan limits. In the Chicago region, she said, an examination of sale prices showed that those prices do not “justify” even the current $275,000 limit, mostly because of falling prices in Lake County, north of Chicago.

However, she noted that “one of the small provisions in the FHA Modernization Act is how you get the calculations,” and this should produce numbers that are “a little higher” but that this still will depend on the upward movement of market data.

“We’re trying to bring everybody back home to FHA,” Heaney concluded.

“We’ve lost a lot of business and that business, we know, has gone to subprime, particularly minority borrowers.”

The areas that once had high numbers of FHA loans became areas with high numbers of subprime loans, she maintained. “And those are the areas with very high foreclosure rates. Where subprime loans went, that’s where most communities are seeing problems now. So I think our time has come around again.”

“Many subprime borrowers were placed in situations that were not the best for them,” Gardner said. “And many of those borrowers could have been FHA borrowers. FHA provides better terms and is a safer product for many borrowers. FHA has no prepayment penalties, no negative amortization, no teaser rates or negative amortization.

“It’s clear to us,” he concluded, “that we have to change and have to have more adaptive products.“