FHA Mortgage Insurance Changing Real Estate Landscape

An article in the New York Times on Thursday exposed how the low down payments required for FHA insured mortgages were changing the mortgage and real estate markets-- and not necessarily for the better. Up until the loan limits were raised in the Economic Stimulus Act of 2008, the FHA mortgage insurance program tended to focus on loans in low cost states, primarily in the middle of the country. Texas and Michigan were prime candidates. Now that the loan limits have been increased to $729,750-- a limit extended through April 2010 along with the HECM limits-- FHA insured mortgages are proliferating along the coasts as well. A statistic shown at the NRMLA Reverse Mortgage Conference yesterday gave the FHA a 30% market share of the mortgage market nationwide.

But there is a problem: the Mortgage Bankers Association (MBA) announced yesterday that nearly 1 in 10 homeowners with mortgage payments are delinquent. That's a record high. More than 1 in 6 FHA borrowers are delinquent, a higher percentage than the national figure. As such, the continued proliferation of FHA insured mortgages with extremely low down payments paves the way for further problems for an agency that already has reserve levels below the federally required minimums.

FHA mortgage insurance can help a lot of buyers find their way into new homes, but the difference between a 20% down payment (the amount generally required by private lenders) and a 3.5% down payment (the amount generally required for an FHA insured mortgage) is a significant one. With such a low down payment, it is far more likely that buyers will wind up in homes they cannot afford.

The reverse mortgage industry should keep an eye on this phenomenon as well. Since forward mortgages and reverse mortgages have been considered in much of the same legislation, any changes to loan limits or mortgage insurance (MIP) is likely to effect reverse mortgages as well.