By Marx, Jason
Mortgage Banking , Vol. 69, No. 10
The federal government established the Federal Housing Administration (FHA) during the banking crisis of the 1930s as a means to stimulate the housing market by reducing risk to lenders, thus making them more likely to loan money. To accomplish that mission, FHA provides mortgage insurance on loans originated by approved lenders to protect against loss as the result of default.
* According to its own estimates, the FHA--now part of the Department of Housing and Urban Development (HUD)--has insured more than 35 million mortgages since its inception by providing financing options to families that could not afford the conventional down payment on a home without assistance.
* After the 1980s, however, FHA insured loans began to lose their appeal with lenders. As lending practices evolved and modernized, the FHA was slow to adapt to the changes. And other factors--such as stringent administrative requirements and smaller loan limits--also hurt the desirability of FHA-insured mortgages.
* All of these factors, coupled with the growth of subprime lending programs over the same time period, caused FHA loan originations to decline to an all-time low share of the market. According to FHA data, the FHA's share of all home financing plummeted from 14.1 percent to 3.8 percent from 1999 to 2006.
Now, more than 75 years later, the FHA lending program is being reborn. The Housing and Economic Recovery Act (HERA) and the Obama administration's Making Home Affordable program have made FHA lending an integral part of our financial recovery.
As traditional conforming mortgage lending and credit guidelines tighten, FHA loans allow lenders to obtain financing for borrowers who otherwise might not qualify for a conventional home loan. As a result, FHA-insured loans are the single fastest-growing mortgage product in the market today, skyrocketing to approximately 30 percent of all U.S. loan originations, according to the FHA.
Another reason for the sudden resurgence is the result of changes within the program, such as the FHA Modernization Act, passed in 2008 as part of the Housing and Economic Recovery Act that enables lenders to originate more loans. As lenders search for suitable options to replace subprime lending, and with the government working to make FHA programs more attractive, lenders are turning to FHA-insured loans to enhance their loan portfolios, manage their credit risk and grow revenue.
Many lenders either new to FHA-insured lending or reviving a dormant FHA lending program are realizing that the FHA license-approval process and lending guidelines can be complex. In addition, the Helping Families Save Their Homes Act that President Obama signed in May 2009 now imposes stricter reviews of lenders seeking to become FHA-approved lenders. As a result, some lenders will find that navigating their way through the maze of FHA lending requirements without support is too difficult and costly in terms of time and labor. That's why many lenders are either recruiting professionals with FHA experience or turning to outside consultants to help get them up-to-speed more quickly and accurately.
Navigating the FHA maze
FHA lending requires a significantly different skill set and knowledge base than conventional lending. There are several issues to consider before starting your institution's FHA lending program. They include building a business case for FHA-insured lending to present to upper management; gaining FHA license approval from HUD; and, ultimately, implementing and managing a successful FHA lending program.
First-time FHA lenders, or those reviving their FHA lending programs, may encounter some difficulty in obtaining their FHA license from HUD. A successful license application depends on the development of a detailed quality-control plan. This plan outlines how lenders will operate all aspects of their FHA program and must be submitted at the time the application is filed. …