Editorial: Revenge of the FHA
In today's world, some of the hottest mortgage products to hit the market in recent years have gone bust. Payment-option ARMs, interest-only loans and subprime hybrids helped homebuyers and investors get in as the housing market was cresting toward a peak. But with collateral values falling and default rates soaring, lenders and Wall Street have heaved these innovative private-label products overboard.
There will come a day when innovative underwriting returns to the market, hopefully with a lot less risk layering than was tolerated during the housing boom. But in the meantime, it's back to basics. And back to some forgotten loan products that had seen their star fall during the boom.
Loans guaranteed by the Federal Housing Administration were once a cornerstone of the first-time and modest-income homebuyer market. Now, after years of seeing their market share deteriorate, the FHA is back with a vengeance. Lenders looking for loans that can still be sold into the secondary market are embracing the FHA, despite the lower margin on FHA product. (But don't forget, higher servicing fees on FHA loans make them an attractive option for companies that hold onto the servicing rights. Historically, prepayment speeds have also been lower on government-backed loans.)
Moreover, consumer advocates and policymakers are also turning to the FHA to help alleviate the growing subprime foreclosure crisis. With FHA secure, qualified subprime borrowers can refinance out of loans they may no longer be able to afford after teaser rates expire and payments reset. The subprime meltdown has added new impetus to an effort to revamp the FHA to make it more attractive in today's market. Over and over, we see loan originators reporting that they've re-energized their conforming loan programs and their government loan programs. Despite the tightening of underwriting standards across the industry, many lenders are seeing volumes grow as low interest rates draw qualified buyers into the housing market. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/