Mortgages as investment planning tools
Can the FHA bounce back?Charlie W. Elliott Jr., MAI, SRAsub-prime, HUD, legislation While still reeling from the sub-prime meltdown, those prime decision-makers in the sub-prime market are, no doubt, considering where to go from here. They may very well be thinking about how that branch of the lending industry-tree became so laden with problems that it collapsed under its own weight. They may also be thinking about the timing of the meltdown, and why things are so different today than in the past. Could the problem be one of self-discipline or the lack thereof? Could the roots of their problem have been akin to that of Enron, where the corporate culture reeked to high heaven, from top management on down, with little consideration for the future and with an eye only for a quick buck? It is impossible to accurately lay the blame for the demise of the sub-prime industry, as we have come to know it, squarely at the feet of those individuals or companies responsible. It is much too large of a problem, involving an entire industry, political pressures at the highest levels and a large socio-economic stratum of the population. As to its timing, this may be easier to address. For decades, the federal government has, in one way or another, offered programs designed to help low- to middle-income people who were unable to qualify for prime loans, purchase homes. One of the most popular of these programs is the Federal Housing Administration (FHA) loan. Most of you who follow this sort of thing will know that the FHA program has fallen out of favor with borrowers in recent years. The number of FHA loans has declined, while the number of loans overall has increased. There are numerous reasons for this, and I will attempt to list a few of what I consider the most important below. -FHA loan-to-value ratios are 97 percent and not 100 percent or 125 percent, as we have seen in other segments of the mortgage market. -While there may be conflicting opinions on this, there is no doubt in my mind that FHA loans are made to a stricter regulatory standard than that of sub-prime loans. This has allowed fast-and-loose wheeling and dealing among sub-prime lenders, which has seemed more attractive to many borrowers. -At this writing, the FHA loan maximum has been capped at what many would consider too low a level. Even in the most expensive markets such as California and New York, the maximum FHA loan available is $239,250, and it is much less in other parts of the country. This is less than the median housing prices in many markets. Consequently, borrowers have been seeking higher loan amounts, which were available in the sub-prime market. -FHA does not offer alternative financing, such as that of interest-only loans or balloon loans, which are offered by many lenders. While many borrowers have opted for these unique loans, they come with their risks, and this product is what has gotten many borrowers in trouble. U.S. Department of Housing and Urban Development Secretary Alphonso Jackson is urging bankers, lenders and counselors to lobby Congress to pass a bill aimed at offering homebuyers an alternative to sub-prime loans. "FHA reform could be one important answer to our sub-prime problems," Jackson said. "I ask you to help us to ask Congress to expand our authority." There was legislation that passed a House committee recently, making it easier for low- and middle-income borrowers to get a mortgage from the FHA. One provision would make it possible for buyers to obtain 100 percent loans, thereby eliminating the requirement for a down payment. Some legislators and regulators are discussing ways that sub-prime borrowers, already in danger of losing their homes, may obtain FHA loans. The sub-prime market has eroded the FHA market in recent years, and those at the FHA would like to recoup some of this market. Lately, the FHA has made some changes to make it easier to get an FHA loan. Among them is the elimination of the requirement that FHA appraisers complete the valuation conditions sheet on each appraisal prepared for a FHA loan. This form required the appraiser to answer many questions about the condition of the property over and above that of a typical appraisal. This was done, in my opinion, because appraisers did not like the extra work and the extra liability that it represents. In some cases, lenders could not find appraisers willing to do the work or, if they did, the fees were much higher than those for standard appraisals. By eliminating this requirement, the FHA product became a bit more competitive. In summary, FHA loans have in the past been the sub-prime market in the United States. Recently, FHA has lost market share to the many mortgage brokers and banks in favor of competing alternative products, such as no-money-down and interest-only loans. The FHA loan was the most conservative of the options to the borrowers. Consequently, the FHA did not lose money on its loans, but it has made fewer of them due to the fierce competition. Its competition was made up, in large part, by sub-prime mortgage companies, as well as some banks and other financial institutions making more aggressive and riskier loans. Recently, with refinancing becoming harder to get and interest-only loans ballooning, people in these alternative loans found themselves trapped. In addition to these problems, many borrowers found that the market to sell their homes was softer than it had been in the past. All this came together to form a sort of perfect storm, causing many foreclosures and the sub-prime lenders began running for the hills. This is a perfect opportunity for the FHA, which has been on the sidelines keeping its powder dry. Watch for the FHA loan to become one of the products of choice for sub-prime loans going forward. This represents an opportunity for most lenders to serve this very large market and to do it with relatively low risk. It also offers vender-service providers, such as appraisal companies, with new opportunities to expand into new venues not experienced to any great degree lately. Yes, the FHA loan is a product whose time has come. Patience has paid off and much of the competition has left the arena, licking its wounds. Timing is everything, and it is time for the FHA to step in and take over the lions share of the sub-prime loan market. Charlie W. Elliott Jr., MAI, SRA is president of Elliott & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889, [email protected] or through the company's Web site at www.appraisalsanywhere.com. Previous columns he has written for The Mortgage Press can be seen on the Elliott & Company Appraisers Web site.