Show Your Support for FHA

In 2009, more than 800,000 borrowers who refinanced with FHA saved an average of $130 a month; meanwhile, FHA insured almost one million home purchase transactions. Image: David Sacks/Lifesize/Getty Images

The Federal Housing Administration is playing a critical role in the recovery of the housing market by providing mortgage insurance at low rates in many markets, often where the private sector doesn’t want to go. Without it, there would be fewer homebuyers, so it’s important for current homeowners to support the program.

FHA there in tough times

FHA’s mortgage insurance program comes at a cost during challenging economic times. This year, FHA’s financial cushion will fall below where it’s required to be. However, FHA has never required a federal bailout in its 75-year history. And its independent auditor predicts FHA won’t lose money because it will have enough reserves to pay its mortgage insurance claims.

Congressional critics worry that FHA will need a government bailout. They say too many of the FHA borrowers whose loans were insured before 2007 are failing to make monthly payments and the current lack of other mortgage options has more poor-quality borrowers flocking to FHA.

Supporters on Capitol Hill say FHA has set aside enough reserves to cover future losses despite the current historic decline in the housing sector. They also point to new FHA lending rules that make it tougher for borrowers to qualify, which should reduce the number of bad loans going forward so the reserves are built back up.

A significant portion of loans currently performing poorly in the FHA portfolio were from seller-funded downpayment assistance programs, which are no longer permitted, supporters add. 

Helping the housing recovery

Before FHA was created in 1934, there was no such thing as a 30-year, fully amortizing home loan. Homeowners who couldn’t refinance after the first five years of the loan (which was almost impossible after the depression hit) had to pay off their loan.

Back then, homebuyers needed a 20% downpayment to buy a home. Saving that much money was a great barrier to homeownership. Today’s FHA allows borrowers with good credit to buy a home with as little as 3.5% down and to refinance easily.

It’s a popular program in a tough mortgage market. In 2009, FHA insured one-third of the home purchase mortgage market, almost a million transactions. First-time homebuyers bought 80% of those homes. 

“In this economy,” according to Nicolas P. Retsinas, director of Harvard University’s Joint Center for Housing Studies, “it’s difficult for families to save due to low wages, and it’s difficult to have a pristine credit rating. Without FHA, they would have no place to go to get home financing.”

FHA is also a much-needed source of funds for current homeowners who want to refinance. The more than 800,000 borrowers who refinanced with FHA in 2009 saved an average of $130 a month, for an estimated total annual savings of $1.3 billion, FHA data shows.

Current legislation

In response to a challenging housing market, Congress is looking critically at FHA and considering limiting the size of loans FHA can insure and increasing the downpayment requirement.  

In October, Congress extended the current loan limits of up to $729,750 through Dec. 31, 2010. The “Increasing Homeownership Opportunities Act,” H.R. 2483, would make that limit permanent. Committee Chairman Barney Frank says he expects to consider this legislation in 2010.

Opponents of the current limits contend that FHA’s mission is to help low- and moderate-income households become homeowners and that the limits are too high. Those who favor extending the limits say any reduction would dry up the flow of mortgages in areas with high home prices, which could slow or halt the housing recovery. FHA contends that their mission is to serve all of the underserved–those not reached by the private mortgage market.

Another proposed bill, H.R. 3706, the “FHA Taxpayer Protection Act of 2009,” would increase the required downpayment to 5% from 3.5%. This bill has been referred to a committee, and no action is expected.  

Supporters argue that increasing the borrower’s financial commitment reduces the risk of default on the mortgage. However, the increased downpayment wouldn’t add any funds to FHA’s reserves and could put homeownership out of reach for many families. For some families, it would deplete cash reserves for emergencies even further.

How to support FHA

Going forward, FHA is likely to find its way on to the Congressional agenda. As it does, you may want to contact your U.S. Representatives and Senators and let them know you support FHA because it helps Americans affordably and safely purchase and refinance their homes.

Jeannette Bernay has been in the real estate industry for over two decades. She lives in western Washington State on an 8-acre lot shared with her two horses, two dogs, and three cats.