Is FHA Trying To Force Private Lenders Back into the Market?

A recent article on CNBC reported that it looks as if the Federal Housing Administration (FHA) is trying to downsize its share of the mortgage market these days. Over the past year, loans sponsored by the government have made up almost half of all new loans. That is mainly a result of all the tightened lending standards that private banks have adopted in the wake of the housing meltdown. FHA loans are some of the only programs left that don’t require much of a down payment or absolutely perfect credit.

But it’s not necessarily very healthy for the government to be the backers for so much of the mortgage market. Not for the government, in case more foreclosure waves come down the pipelines and not for the market, as it reduces the options for consumers.

A few changes are set to take place with FHA loans soon that may send borrowers looking more seriously at private lenders. First, upfront mortgage insurance (MI) is being decreased, but the monthly cost of MI will go up. (For example, for a $250,000 loan a borrower would borrow $3,125 less up front for MI, but would pay about $50 more a month for the life of the loan. Second, the CNBC article says that “new seller concessions policies” are soon to be effective as well, which could make FHA loans less appealing.

“These two policy changes will increase the opportunity for private capital to return to the market while improving the safety and soundness of FHA,” said FHA Commissioner David Stevens in the article.

He also added “MI in conjunction with a Freddie or Fannie mortgage lays the groundwork for establishing the threshold levels at which point private capital pricing can succeed in attracting the consumer more broadly.”

I don’t think anyone is arguing that the private lenders shouldn’t start taking back a larger share of the market – the problem is that there are not enough investors in the mortgage securities market to make broader private lending feasible. Let’s just hope the new FHA rules do not further limit the few loan options on the table now for most borrowers.

3 Responses to “Is FHA Trying To Force Private Lenders Back into the Market?”

1. paskolos says:

   September 30, 2010 at 12:53 pm

   Great article thanks.
2. Short term investments says:

   November 3, 2010 at 5:58 pm

   Anytime the government gets into the banking industry it causes trouble. This is one of the main reasons that the economy is in the shape it is in today. The housing market will take years to recover due all the no doc loans that lending institutions were forced to give out.
3. Mary Thompson says:

   November 8, 2010 at 5:29 am

   The main problem with the financial sector was forcing banks to make loans that people could not pay back. Seems like we’re going back to those days.