A frequent question from loan officers and mortgage brokers is in regards to the longevity of the FHA mortgage product. I received an email just yesterday from a FHA lender asking me the following, “Do you believe that HUD will pull the FHA loan programs for borrowers looking to refinance their home?” Since the subprime crash of 2006, there are still thousands of FHA mortgage brokers who rely heavily on FHA home refinancing. I wanted to address this in this article, because I believe that FHA lending is in jeopardy. FHA loan defaults have been climbing like the rest of the mortgage industry. FHA is a government home loan program and our government is in serious debt. The US government owns nearly 97% of all mortgage securities, so if the homes continue to be foreclosed upon because borrowers are not making their monthly loan payments, then it is safe to say that yes the future of FHA financing is cloudy at best.
Let’s take a look at the FHA loan programs at risk.
FHA 203B – This FHA loan program enables borrowers to get cash out up to 85%. FHA reduced it 10% from 95% cash out refinancing last year. It will be interesting to see if the 10% reduction helped reduce FHA loan defaults for borrowers who took cash out when they refinanced their home.
FHA Streamline – This legendary refinance loan is only for existing FHA borrowers seeking a rate and term refinance. HUD tightened the FHA guidelines by not allowing borrowers to finance the lender closing costs. FHA streamlines do not allow cash out and this new rule has significantly reduced the number of FHA streamline refinances in 2010. My guess is that the streamline program will survive if FHA survives.
FHA Home Loans – FHA goes hand in hand with first time home buying loans so it’s hard to imagine FHA would eliminate their flagship mortgage product, but if FHA loan defaults continue anything is possible. In 2009 FHA loan reserves dipped to dangerously low levels, so funding the FHA program must continue to pass through Congress. Last year FHA increased the down-payment requirements from 3% to 3.5%. I would anticipate that this will go to 5% sooner rather than later.
To HUD’s credit, FHA loan requirements for FHA lenders have increased dramatically. These changes were made to further solidify lending and weed out the shady or uncommitted lenders. As mentioned earlier HUD also mandated significant changes to FHA guidelines. Down-payment, home equity and cash out requirements were all tightened in 2009 and 2010. It is my contention that the FHA loan product will survive, but I believe we the tightening of guidelines is far from over.
