The subprime financing options have all but disappeared: A combination of foreclosures , Wall Street's trimming the fat of subprime securities and recent sagging home prices in declining markets have had a serious impact on the broad lending programs offered just a short time ago. Even the nation's largest backer of loans, Fannie Mae, announced new loans accepted after January 15th 2008 in declining markets may be subject to a 5% reduction, meaning a 100% purchase could be reduced to 95% which requires additional funds from borrowers. As a result of all these events, other lenders have been forced to follow suit. Lenders have severely tightened lending guidelines, creating a tremendous slowdown that has forced over 200 national non-prime lenders to file bankruptcy and literally close up shop.
There is a potential upside for millions of homeowners and future homebuyers: Those with blemished credit who may be looking for financing now or in the near future as a result of an adjustable rate mortgage or simply looking to eliminate a high rate of interest and say goodbye to prepay penalties may have some new options to choose from. The world's largest insurer of mortgages, the Federal Housing Administration (FHA), is working to modernize its lending practices to make it easier for both potential homebuyers and current homeowners to seek financing from the underutilized FHA as a new option to subprime mortgage loans.
Some of the Modernization reforms include: The initial effort was the establishment of the FHASecure which helps distressed home owners in foreclosure have an immediate refinance solution to interest rate adjustments. While the real success of this plan is still in question due to its limited qualifiers other reforms have real potential.
Raising the FHA loan limits from the current $362,000 to the Fannie Mae conforming limit of $417,000 to match the current value appreciation in homes is one solution. Also awaiting approval is the elimination of the 3% down payment requirements. The other major change eliminates the 2.25% initial mortgage insurance premium and instead utilizes risk based mortgage insurance which allows borrowers to obtain single digit market rates in contrast to subprime lending which charges damaged credit borrowers up to 3% above market rates with short term loans and prepay penalties to insure profit to secondary markets. Since the FHA will not offer exotic loans such as interest only arms, they are proposing longer loan terms such as 40 year amortizations which allow some portion of the payment to still reduce principal.
Why FHA Now: The Federal Housing Administration has been around since 1934. FHA was originally created for low income borrowers to obtain home ownership through loans that were backed by the federal government. FHA can be a great alternative to the nonprime loan because the underwriting method takes a holistic approach to loan approval rather than strict FICO credit requirements, allowing more borrowers to qualify who have stable employment and income.
During the recent housing boom, alternative lending and increasing house prices left FHA only serving a very small percentage of the market. Additionally, FHA had more specific requirements for lenders and borrowers to comply with, making the stated, no down payment and fast and easy loans offered by non conforming lenders more appealing.
So it is said "hindsight is 20/20". Unfortunately these issues went unnoticed during the good times and efforts to overhaul lending practices were not implemented by congress until much of the damage had already occurred. While the mortgage market meltdown was inevitable, at least there may be a solution with FHA on the horizon to give both homebuyers and homeowners a mortgage that will keep them in there home for the long haul and ease the entry into the market for homebuyers and stimulate our stagnate economy.
