FHA home mortgage programs are currently under threat of extinction. The FHA home mortgage could die a needless death if reforms don’t pass Congress quickly and correctly.

Due to a number of reasons, the long-standing govenment FHA home mortgage programs are quickly becoming irrelevant. So much so, on the floor of the US Congress a few years back, their was a proposal to discontinue them altogether. Before we discuss the reasons, let’s refresh your memory on the basics of these mortgage programs.

What are FHA Home Mortgage Loan programs?

The FHA home mortgage loans are considered “Government” loan programs along with USDA and VA loans because they are directly insured by the Federal government. Conventional loan programs in comparison are insured by private companies such as Fannie Mae, Freddie Mac and other private mortgage insurance companies. Many folks mistakenly believe those two “F” organizations are government agencies as well. They aren’t! They are NYSE traded private companies, not backed by government in any way.

An FHA home mortgage is insured and underwritten by the Federal Housing Administration. An FHA home mortgage is commonly sold to first time home buyers who may have some credit issues and little down payment. FHA loans require 3% down and the borrower can finance the closing costs (on refinances…roll them into the loan amount). In addition to all the other closing costs, FHA loans require a 1.5% up front mortgage insurance premium. If you have a 200k loan amount, $3,000 is added to your loan amount for a final $203,000 FHA loan.

There is also a monthly mortgage insurance premium added to your payment every month. The FHA loan has loan limits that change. For example, in 2006 FHA limits loan amounts to $308,370 in Adams county Colorado. These limits are different for every state and every county in the state.

FHA home mortgage programs have seen a significant drop in use over the last few years. It’s estimated they only represent about 13% of the mortgage marketplace. In the fall of 1995, the Senate even entertained a bill to abolish both government programs along with HUD. FHA loans may soon be a thing of the past.

The first threat to FHA home mortgage loans is the encroaching conventional loan programs from Fannie Mae and Freddie Mac that address low or no down payment or bruised credit. They also have better mortgage insurance without charging anything up front and tacking it onto the loan balance.

The 100% conventional loan programs also don’t leave the new home owner in an upside down position like the FHA program. Nor do the conventional loan options maintain the monthly mortgage insurance indefinitely like the FHA home mortgage. Once a borrower obtains an 80% loan to value on a conventional loan, he can petition his lender to remove the monthly mortgage insurance payment. Not so, on the FHA home loan!

The second threat to FHA home mortgages is the low loan limits we mentioned earlier. FHA home mortgage loan limits restrict their use in high cost areas like California and New York. This must be corrected immediately if the program is to survive.

Another threat is net worth and capitalization limits for those that sell an FHA home mortgage. Banks seem to be the only ones who can afford to market them since they are the only companies rich enough to qualify. Since mortgage brokers are still responsible for about 60% of originations, if they want to survive relaxing those limits would allow brokers to market and sell their programs as well.

So the private marketplace is making these government mortgage programs obsolete…but Congress is entertaining some legislation to reform the FHA home mortgage program. The new reforms are addressing each of these threats and could breath new life into the programs.

This new legislation is getting fast-tracked not because Congress knows about the threats, but I’m afraid they see the FHA home mortgage program as the answer to the subprime mortgage meltdown.

Yikes!

A New “After Reform” Threat: Allowing the FHA home mortgage program to become the dumping ground for subprime refinancers.

One word of caution to the law makers is in order here. Don’t let Wall Street dump all their “bad paper” on the American Taxpayer in the form of subprime loans refinanced into FHA home mortgages.

The subprime Wall Street players made huge profits for the past few years, but now they realize they screwed up and want Congress to bail them out with a new and improved FHA home mortgage source of funds. The new FHASecure program is an example of this “bail out” source of funds.

If Congress allows this to occur, the FHA home mortgage will die as surely as the subprime loans died.

Good Luck!

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