FHA Off the Bench in the Jumbo Home Loan Game

Why Lawmakers Left Fannie Mae and Freddie Mac on the Bench

We've all heard the stories about the second-team players which were propelled into a starting lineup position because the regular starters were not well enough to go out and play -- or whose performance in the past no longer merited them a starting position. The same was philosophy is right on in describing the Federal Housing Administration's (FHA) role in 2011. It became the favored U.S. mortgage banking lender --purely by default.

Just prior to Thanksgiving, U.S. lawmakers made a move to step up the maximum loan amounts that can be insured by FHA, as Congress sent sent a message that it would prefer to rely upon an agency it could most likely control over Fannie and Freddie that have not lived up to its expectations.

There's no point in promoting players whose time on the field you wanted to cut down -- or which you are thinking of entirely cutting from the team

A spending bill Congress passed restored the $729,750 maximum mortgage size that can be insured by FHA, which insures buyer's loans having down payments as little as just 3.5 percent.

Although the move placates the big lobbying efforts by the National Association of Realtors (NAR) along with the National Association of Home Builders who asked for additional incentives for luring additional homebuyers, it also adds more pressure to a Government agency that was not set up to carry such a huge load.

FHA was created to be a backstop, not the primary field. FHA had around 3.5 percent of what's called the forward market. in 2005. .Now, it has nearly 30 percent of this market, plus the Home Equity Conversion Mortgage business (HECM), and pretty much the same amount of employees.

The HECM, is the most popular program for reverse mortgages in the nation and insures over 85 percent of all reverse mortgage loans.

The Upshot is that Congress no longer wanted to enhance, promote, or support Freddie or Fannie, a pair of government-sponsored enterprises (GSEs) developed to allow mortgage funds to be more obtainable plus affordable for nationwide. borrowers. But now many Congressional members are questioning the government's housing role, especially when tied to huge continued losses by both Fannie and Freddie, federal legislators were no longer willing to change the way GSEs decide their maximum mortgage loan ceilings.

Bottom line, Congress threw a bone to the housing industry when it reinstated the higher FHA amounts although showing its displeasure by leaving the two biggest players sitting on the bench.

Established by a formula set up by the Housing and Economic Recovery Act of 2008 (HERA), Fannie and Freddie loan-limit adjustments are based upon average price decreases or price increases from October to the following October. There's a benchmark number in place to protect a downward slide, with a limit to the actual "floor" numbers while at the same allowing for an escalating ceiling. in view of the fact that the Federal Housing Finance Agency became aware that prices actually went down just about every place, the national price ceiling was not changed. In an Ironic twist, at one time it was just the opposite, Fannie and Freddie in the past were the favorites of everything mortgage while FHA was thought of as a problem child

Periodically, some Congressional members wanted to remove FHA from HUD and moved to the private sector. For years, "these government housing" options -- in particular FHA loans -- were thought of as being problematic while heavily enveloped in red tape.

Three years ago, as money became tight while jumbo mortgage loans became hard to find, FHA turned into a kind of safety net for numerous mortgage brokers. Some lenders went on to say that FHA loans were almost 40 percent of their mortgage business, almost double the preceding five years volume combined.

The answer by the government was to fix the problem by providing more money to lenders so that they would lend it to home borrowers along with small businesses. The cash never returned in the way it was intended.

So, late in 2011, FHA was named as the best team player again -- providing more first mortgage loans, purchase-rehab loans, reverse mortgages, - while hang around to see if there was any help left from their fading stars or perhaps some new players from the private sector.?

Jan 4, 2012

Real Estate Finance