I recently took a continuing education class covering the current status of the FHA. The Instructor, Nikki Turner, is a prominent Mortgage Officer with Wallick & Volk in Flagstaff. What is listed below is a paper she wrote for the class. With Nikki's permission I have reproduced the article in it's entity. I hope you get as much out of this presentation as I did.

Jim Tress, ABR

Russ Lyon Realty Company of Flagstaff 

FHA the New Subprime, written by Nikki Turner

In previous decades the mortgage industry followed the plain vanilla, one-price fits all approach.  If you qualified for a 30 year loan, the rate was the same for you as for the next applicant, regardless of your credit history.  In effect, interest rates were cross-subsidized.  People with the best credit paid a little more in order to cover the costs of defaults by borrowers with shakier credit.  Nobody talked about the issue, but that was the reality.

The traditional approach went out the window in the mid- 1990's for most lenders, as sophisticated electronic "risk-based pricing" technologies hit the market.  Virtually all lenders now feed applicants' credit scores, raw credit file data and other information into inline assessment systems, and quote rates and fees according to applicants' perceived risks of future nonpayment.

The only major player in the mortgage market that never shifted to risk-based pricing - FHA, the largest federal mortgage program for first time and minority homebuyers.  But that may be about to change/

According to Jerry Brown, a public affairs officer with the FHA, the administration wants to make it easier for low and middle income, credit damaged and first-time home buyers to get a foot in the door.

FHA was created in 1934 during the Depression to stimulate the housing market. Over the past 73 years, FHA has helped 34 million families become homeowners. However, as the mortgage industry has changed in recent years, FHA's products and practices have not had the ability to adapt to evolving lending practices without Congressional legislation. Many traditional FHA borrowers, with less-than-perfect credit and little money for a down payment, have turned to high-cost, risky loan products, especially subprime loans, because FHA's loan limits are too low and the down payment requirement is too stringent.

Ginnie Mae currently guarantees $412 billion in mortgage-backed bonds, two-thirds of which are backed by the fixed-rate loans to low-income borrowers that FHA insures.  Congress created the FHA in 1934 to stem a Depression-era drop in homeownership.

FHA loans used to be more popular, but they were eclipsed by easier-to-obtain subprime products. Their market share fell from 18 percent of all home loans in 1990 to less than 4 percent by 2006, according to the National Association of Home Builders.

 "Applications for FHA-insured loans have stabilized after falling to a 4 percent share of the new mortgage market from 14 percent in 2000, FHA Commissioner Brain Montgomery said in an interview.  Ginnie Mae's hold on the market in mortgage bonds sunk to 4.1 percent last year from 9.4 percent in 2002.

"We have started to stop the hemorrhaging," he said in an interview in Washington.  Applications for FHA loans rose 9 percent to more than 146,000 in the fourth quarter from a year earlier, according to Montgomery."

One reason is that the application process for an FHA loan is more tedious and requires more paperwork than that of subprime loans touted during the housing boom.

Today, there's a new push toward FHA. Assistant Secretary for Housing, Brian Montgomery, testified before a congressional committee in favor of modernizing the process for the benefit of "troubled subprime borrowers."

Requested changes include: Eliminating a 3 percent down requirement, which would enable more low income borrowers to qualify; increasing the maximum loan to reflect the increase in home prices brought by the housing boom; assigning rates by risk to enable borrowers with higher credit scores to receive lower interest rates.

Another push is for offering new financial incentives for FHA-approved mortgage lenders to bend over backwards to help owners who fall behind on their loan payments to remain in their homes and avoid foreclosure through forbearance agreements or loan modifications.

Say your spouse got sick and you missed several months of mortgage payments.  An FHA loan servicer or lender would automatically begin discussions with you on alternative solutions to your payment gap, including the possibility of modifying the basics terms of the loan.

The legislation, which passed the House of Representatives last year and stalled in the Senate, would also enable the FHA to more easily insure loans for condominium purchases and raise the dollar limit for FHA-backed mortgages.  The highest loan limit is $417,000.

The Bush administration is touting the FHA as the best conduit to help borrowers recover from the failure of more than 24 subprime mortgage lenders that have shut down or sold operations since January 2006 as delinquencies surged.  The Mortgage Bankers Association on March 13^thsaid 13.33 percent of subprime borrowers were behind on payments in the fourth quarter, the highest rate since the third quarter of 2002.

FHA's mortgage programs typically have no maximum income limits for qualifying; many high-income borrowers have FHA loans. But, as Brown pointed out, FHA loans target low and moderate income borrowers and offer little advantage over prime rate loans. Few high-credit-score borrowers choose to go through the more complicated process of obtaining them.

Nearly 80 percent of Americans support legislation that would promote and protect the dream of homeownership by providing a safer, fairer and more affordable mortgage alternative to high-cost subprime loans, according to a new survey released by Wells Fargo. Speaking at the Wells Fargo Housing Symposium, U.S. Housing and Urban Development Secretary Alphonso Jackson, who took over the top spot in the housing department last year has no "beef" with the subprime lending industry.  But he thinks the new FHA loans coming into the market are often superior to their subprime competitors on rates, fees and consumer protection features.  He said the survey demonstrates the urgent need for Congress to pass legislation that would modernize HUD's Federal Housing Administration (FHA) and help hundreds of thousands of borrowers find an exit strategy from their exotic subprime mortgage loans that could ultimately result in foreclosure.

This survey demonstrates the urgent need for Congress to pass legislation that modernizes the FHA to help both promote and protect homeownership."

Jackson added that he believes the housing market is making a needed correction and will have a bright future. "The housing market can, and will, continue to grow. After all, homeownership stands near the all time high...at historic levels. Nearly 70 percent of all American families own a home. We should view that fact with pride. But there is work to be done. If we are going to stimulate growth in the housing market we will have to wisely engineer some important changes" - including a modernized FHA, Jackson said.

FHA wants to regain their market share.  In doing so FHA will need to get out of the one-size-fits all approach because one size no longer fits all.  FHA will need to spread out the risk and price differently.

"The best way we can save low-and moderate-income Americans is to modernize FHA," Department of Housing and Urban Development Secretary Alphonso Jackson told the House of Financial Service Committee on March 14, 2007.

Senator Hillary Clinton, a Democrat from New York, said on March 16, 2007 that she plans to introduce legislation that would help subprime borrowers by streamlining FHA, including allowing the agency to offer a broader range of mortgages.

"We need to expand the role of the FHA to issue more mortgages at better rates, she said in a Washington speech, The agency "must be made to work better."

The subprime implosion will drive more borrowers to the FHA and boost Ginnie Mae's Market share, Ginnie Mae Executive Vice President Michael Frenz said in an interview from Washington.

"As you get increasing scrutiny and fewer providers to subprime lending, some of those borrowers will no doubt get FHA loans," Frenz said.

The market has realized the massive shift away from FHA hasn't always been in consumer's best financial interests, however.  Some have ended up with mortgages that sounded good at the application stage but turned out to have unexpected costs.

The mortgage industry has evolved and the loan officers have adapted.  Some loan officers have educated themselves to become a mortgage advisor.  It is the time to be the expert in order to take a client's financial portfolio and diversify in order to minimize risk.  Allow one's financial portfolio to grow wealth by intergrading, real estate, life insurance, the tax impact, equity management, products, wills, trusts, real estate investment planning, understanding the impact of leverage, level of liquidity, knowing your marketability, evaluating investment management issues, calculating rate of returns of their investments and most of all investing with a business plan.

Could you image working with a mortgage planner when asked what do you do for a living hearing a response that sound like this, Today, I see a mortgage loan, more than ever, not as a mortgage loan once was, but instead as a financial instrument that must be tied into your long and short term personal financial plan, allowing the consumer to create a debt strategy that helps in building long term wealth creation for the client and their family?

That would be an individual that I would want to be advising me.  Buying a home is one of the largest investments one might purchase in his or her life time.  Did you know that most Americans spend more time researching the auto loan they are going to use to purchase a vehicle than a mortgage company?  It not as simple at finding the lowest interest rate in today's market.  Why is interest rate so important, because payment is important?  What if you received the lowest interest rate available but you lost thousands of dollars being in the wrong program due to being in the wrong product.

For example, subprime loans frequently carry hefty prepayment penalties - thousands of dollars owed to the lender if the borrower refinances during the first two or three years.  FHA insured mortgages, by contrast, do not include prepayment fees. 

The mortgage industry has also evolved to a point were there are loan officers that have adapted in a negative way not benefiting the consumer.  Some loan officers lack in education.  This inability to perform at an advisor level can be explained from the thought process of a transactional industry.  This one deal, this one application or this one client which can be paycheck driven.  Ignorance of the responsibility that a loan officer should be account for the advise that have been offered to the client.  This is the reality of any sales driven industry. 

After the subprime mortgage market collapse, many products that were widely available have disappeared from the scene.  More than a few of subprime lending specialists have closed their doors.  Many banks like Washington Mutual and Wells Fargo have cut back or eliminated subprime loans, leaving many credit-damaged home buyers scrambling to find a loan.  But now that the collapse has shaken out some of the sketchier players, some familiar and more reliable alternatives to subprime are making a comeback  -- but they do require some work.

Who is ready to play ball?