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Will FHA Trouble Effect Sonoma County?

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Will FHA Trouble Effect Lending in Somona County?

In 2008 in Somona County when mortgage lending came to a screeching halt, FHA was the only insurer on the market who kept taking applications and did not reel in guidelines excessively.  While Fannie Mae and Freddie Mac did abrupt about faces on their lending, FHA kept originating loans, having already made its lending procedure less onerous years before.  FHA did raise its minimum down payment to 3.5% from 3% and it's up front mortgage insurance premium to bolster the insurance funds in this time of great risk, but overall, it remained a sensible place to get a loan.  Many Sonoma County loans were originated in the FHA program.

Because of the tightening of credit, FHA gained market share nationally and in Sonoma County, increasing the amount of all new mortgages it insures from 6% in 2007 to 21.5% in 2009 so far.  Many are asking if FHA is the next institutional shoe to drop; requiring rescue and bail out.  Recent delinquencies and foreclosures are up to nearly 8% at the end of June 2009 from 5.5% in 2006.  And in the near future, its reserves for loan losses are expected to slip below federally mandated limits.

FHA's Commissioner, David Stevens, says that FHA will not need government funds to be sustained.  The insurance fund is created by collecting a 1.75% up front fee for mortgage insurance in addition to a monthly MI fee.  All FHA loans require payment of this fee whether 3.5% or 20% down payment was made.

Some are comparing the possible FHA falter to Fannie Mae/Freddie Mac demise that required the government to step in and take over.  But FHA is different than the big mortgage giants in that it engaged in much less risky lending than the privately owned lending giants.  FHA did always require solid proof of income in order to get a mortgage.  Also, FHA always required a down payment while Fannie/Freddie insured 100% + loansFHA offers 30 year fixed mortgages only, whereas Fannie/Freddie had many adjustable rate mortgages that created problems for many borrowers. 

In my observation, the defaults FHA is experiencing now are not do to loans given to those who shouldn't have them, but due to the loss of jobs in our struggling economy.  Here in Sonoma County, I know of one FHA default of all the FHA loans I originated since 2003 and that was due to a job loss.

As these issues come before a congressional committee, FHA and our government hope to ward off any further weakness in FHA that could threaten a lending outlet that has been a bright spot in this credit constrictive market.  One proposal on the table is to increase minimum down payments to 5%.

Comments (1)

Steve, Joel & Steve A. Chain
Chain Real Estate Investments & Mortgage, Steve & Joel Chain - Cottonwood, CA

Kathy, Good post.  FHA's long term viability, of course, remains to be seen.  While shakeup in the real estate market and associated mortgage industry has been remarkable.  I don't believe we can discount the ability of government and certainly private industry to innovate and create solutions to problems. 

Oct 12, 2009 07:09 AM