As the gavel came down on recent Mortgage legislation, it appears that the Federal Housing Administration gains increasing power by the day. While many believe that the government becoming more active in the mortgage market will help lower the playing field for lower income borrowers by increasing regulations on subprime lenders, there are others who are a bit concerned about the increase in FHA powers.
While we remain neutral on the issue of government intervention (we’re in this for you), we need to take inventory on what the growth of FHA originated loans actually means. After all, government activity will only really benefit everyone if its demonstrably better than the sub prime market it is regulating.
As a first step, it’s important to understand exactly how the Federal Assistance Mortgage program works. While it might seem like the government is lending money to provide loans, there is not currently the case.
Although proposed legislation (including John McCain’s Revitalization Plan) has suggested the government take direct ownership of home loans, FHA loans are designed to back private loans issued by banks that meet certain terms and conditions – the government is essentially serving as a backstop on FHA originated loans by guaranteeing the bank will be paid in the case that the borrower defaults. What ultimately matters here are the terms that the government puts forward and whether they are fair for the homeowner.
Since the government ultimately wants to make the industry more fair to home owners, they are still advocating for both sides: the FHA has a vested interest on keeping defaults low, but also of originating fewer loans that will go bad in the first place.
So, as FHA loans become more prominent, it might raise the bar for getting a loan in the first place, depending on your situation. While we certainly support reform of the sub prime industry (for many reasons), we need the FHA to replace the loans with a better (not just a different) standard.
Now, of course, credit scores are going to continue to matter. While private credit may require you to have a very strong credit score, the government still wants to see a solid track record and credit history for those who are seeking FHA backed loans.
One difficult provision in the FHA credit line is that you must prove steady employment, which can potentially be difficult given today’s shifting job market. Realize that he FHA is self sustaining, which means that they are not strictly a non-profit – they aim to, at least, break even on the insurance that they sell to mortgage lenders.
So, while we would assume the government would be a better care taker of the mortgage industry, that remains to be seen. There are risk by granting the government agency increasing powers, just as there were with deregulating the entire industry under the guidance of Freddie Mac and Fannie Mae.
In order for real reform to occur, we’re going to need the agencies to become a greater advocate for home owners who need more flexibility to adapt to what are now excessively rigid terms – just as the housing market overall has shifted, the FHA needs to evolve as well.