Barry Thomas
‘Get approved’
As problems in the subprime mortgage market continue, Federal Housing Administration-backed loans are rapidly emerging as the most viable alternative for increasingly risk-averse lenders and borrowers with shrinking options.
The loans are not as heavily used in Massachusetts as other parts of the country, and the 73-year-old agency is not as well-known as its government-sponsored competitors Fannie Mae and Freddie Mac. But local lenders say interest is picking up, especially as easier-to-obtain subprime products disappear from a market shaken by payment delinquencies and foreclosures.
“Today, the watchword in our industry is ‘get approved to do FHA,'” said Barry Thomas, branch manager at Amerihome Mortgage Co. in Burlington. That contrasts with 2004, he said, a real estate rush year during which a single national subprime lender, Ameriquest Mortgage, originated $82.7 billion in loans by itself, while FHA backed $94 billion in total.
The federal agency traditionally has been charged with meeting the needs of borrowers otherwise underserved by the private sector by insuring home mortgages that private lenders otherwise would not offer. The agency also is responsible for stabilizing regional housing markets. More recently, President Bush has directed FHA to broaden its scope to help borrowers saddled with unsustainable loans, and Congress is considering further measures designed to keep mortgage credit from evaporating in certain segments of the housing market. Lenders seeking to keep origination volume up are paying close attention.
However, Thomas said FHA loans differ significantly from subprime loans in many respects because the FHA requires full documentation of a borrower’s income and assets. They also carry interest rates that hover near the prime rate, a better deal for borrowers who qualify.
This year, he said, Amerihome-Burlington already has originated nearly twice as many FHA-backed loans as it did last year. In 2006, the office originated 100 FHA-backed loans; so far in 2007, the number has risen to 175.
Chase Home Finance New England Regional Manager Charles Nilsen also has seen an increase in FHA-backed loans.
“Chase is far more active with FHA [in the past 120 days] than in the past three or four years,” he said. “I’d call that a result of the demise of the subprime and the faltering of Alt-A [mortgage products].”
More than 80 percent of Chase’s loan officers attended a voluntary seminar the bank held Sept. 17 to learn more about FHA loans, Nilsen said. In the seven business days that followed, they accepted 18 FHA applications throughout New England. That compares to five to seven applications for FHA-backed loans the bank typically originates in the region per month.
At present in the Bay State, first-time homebuyers are more likely to get an FHA-backed loan than refinance candidates, Nilsen and Thomas said.
“First-time homebuyers are typically characterized as having very limited down payments,” Nilsen said. Most FHA loans require just 3 percent down payment, and the money can be in the form of a gift.
FHA also is “far more forgiving about low credit scores” than a conventional, Fannie Mae- or Freddie Mac-backed loan, he added, which is an advantage some first-time buyers need.
Thomas predicted that FHASecure, a new loan insurance program, will begin to attract more refinance borrowers soon. The agency, under the auspices of the U.S. Department of Housing and Urban Development, introduced FHASecure less than a month ago. It is specifically designed for subprime borrowers whose interest rates have reset to higher levels.
Loan Limits
However, barriers to use of FHA loans exist locally. The FHA loan limit in Massachusetts is just $363,000, lower than the cost of many homes in the Bay State’s high-cost housing market.
U.S. Rep. Barney Frank, D-Mass. and chairman of the House Committee on Financial Services, co-authored legislation that would raise this “artificial cap” to 175 percent of the Fannie Mae/Freddie Mac conforming loan limit in the region in question, and give HUD authority to raise it still further if market conditions warrant.
Massachusetts’ current conforming loan limit is $417,000; Frank also is pushing efforts to increase that limit.
“HUD has testified [that] FHA does almost no loan business in certain high-cost markets” because of the $363,000 cap, Frank’s office asserted in a Sept. 19 statement announcing that the FHA loan-limit measure had passed in the House of Representatives. Raising the cap “will put FHA back in the business of insuring loans in high-cost areas in California, New York, Connecticut, Massachusetts and other areas with a limited FHA presence.”
At a seminar devoted to FHA lending at the New England Mortgage Banking Conference in Providence, R.I., last month, Gerard W. Glavey, director of the Processing and Underwriting Division for FHA’s Philadelphia Homeownership Center, reminded a standing-room only crowd of more than 60 lenders and originators about President Bush’s recent proposals to “use FHA loans to help subprime borrowers out of a jam.”
On Aug. 31, the Bush administration announced that the FHASecure program and its goal of helping 240,000 U.S. families avoid foreclosure. FHASecure mortgage backing became available on Sept. 5, but the offering is a temporary one that will expire on Dec. 31, 2008.
FHASecure is aimed at borrowers who were “disproportionately lured into exotic mortgages” and whose initial teaser interest rates have reset, causing them to fall behind on payments. It is intended to allow qualifying borrowers to refinance, as well as increase liquidity in a mortgage market that has seen credit tighten as Wall Street investors shy away from once-popular nonconforming loans.
About $1 trillion in existing U.S. subprime mortgages are due to reset to higher rates in the next 24 months, noted Jim Jones, president of Wellesley-based bank strategy firm First Wellesley Consulting Group.
To qualify for FHASecure, homeowners must have a history of on-time mortgage payments before their loan reset, an interest rate that reset or will reset between June 2005 and December 2008 and 3 percent cash equity in their home. Borrowers also must sustained history of employment and sufficient income to meet the new mortgage payment.
Non-bank mortgage lenders typically make greater use of FHA programs than banks, according to Peter Harvey, president and CEO of Intellidyn, a Hingham-based firm that provides marketing data and analysis to financial institutions.
“Banks are not racing to get this done,” Harvey said. “There’s a big bank here in the Massachusetts area that does a good deal of mortgage lending [but] hasn’t bothered to get [its] FHA papers in order, because it’s not a huge benefit.”
Mortgage brokers and lenders, on the other hand, are signing on at the rate of “a couple of users each day” to Intellidyn’s brand-new data set that helps lenders identify and market to potential FHASecure and Veterans Administration loan borrowers, he said.
Bristol County Savings Bank President and CEO E. Dennis Kelly Jr. said his $1.1 billion mutual doesn’t work with FHA-backed loans, though it does offer MassHousing-backed loans as an affordable alternative.
“My guess is that there’s a lot of paperwork involved with an FHA loan,” Kelly said. “We are more than willing to try to help a borrower out; it just depends on how far along they are” on missed payments. “I would encourage them to come in and talk.”
Jones said some banks are interested in FHA backing, but said they also know that about 70 percent to 80 percent of borrowers with subprime loan looking for something better wouldn’t qualify for the conforming, prime loans banks tend to offer.
Also, Jones said, “There’s no doubt [FHA] is a more complex origination process.”
Thomas said he worked for six months with one couple, this year, before they qualified for their FHA loan.
However, Jones said, the FHA loan is the most viable and sustainable option for borrowers needing a way out of a bad subprime loan or for those who have damaged credit to become homeowners for the first time.
“On the federal level, there is not going to be a bigger [alternative loan program] than the FHA,” he predicted.
