July 08: Back in baby’s arms

July 08: Back in baby’s arms

Imagine a loyal, reliable partner, the kind who will rub your back, pluck your nose hairs and take you aside to tell you when you have that little bit of white gunk on the corner of your mouth. Sure, he or she might not be the most exciting figure, and Lord knows they can be high maintenance, but there they are every Friday night, with a great big smile, tub of ice cream and red Netflix envelope in hand.

Now imagine the new girl or guy in town, the one with the fast car, nice ass, and wads of money that they promise to blow on you at all the hottest clubs in town.

So you spend something like the next 10 years’ worth of Friday nights with Mr. or Ms. Excitement, only to have it all come crashing down in, oh, let’s say July 2006. Where do you take your broken heart? Right back to Mr./Ms. Reliable, who welcomes you back with open arms.

Such is the story of mortgages backed by the Federal Housing Administration (FHA). In those heady days of 100-percent financing and NINA loans (no income, no assets), the FHA loans—created during the Great Depression and which traditionally were reliable mortgages for middle-income, first-time homebuyers—lost a lot of their sheen.

Because they were insured, they tended to be a little more expensive up front. And because it’s the federal government doing the insuring, that meant a bureaucratic rigmarole, lots of paperwork, lots of verification. But were they reliable? Absolutely. Low maintenance? Not on your life.

See where this is heading?

During the housing boom, when anyone and everyone who wanted a mortgage could get one, the FHA loans fell out of favor, or more accurately, were pushed out of the market by loans that didn’t require down payments, verification, or a slog through reams of paperwork. With absurdly loose lending restrictions the fashion, FHA loans accounted for 6 percent of originations in 2006. Compare that to 2001, when FHA loans made up 19 percent of mortgages.

But now that the credit markets are in tatters and lending restrictions have tightened up with a vengeance, buyers are coming back around to the FHA loans. According to The Washington Post, the number of FHA loans more than doubled in the first quarter of 2008.

Peggy Deane, vice president of Member Options, which provides mortgage services to the UVA Credit Union, says that she’s seen a resurgence in FHA products.

“We are back in an FHA market,” says Deane. “Over 50 percent of our new originations are FHA loans.”

Doug Adamson of Bank of America also sees signs that FHA loans are on the rise. He says that about two years ago BoA built a state-of-the-art processing program specially for government-backed loans. It was originally able to handle $4 billion in loans a year. This year, though, BoA is projecting about $12 billion in loans.

The comeback of FHA loans was spurred by federal legislation that temporarily raised FHA loan limits, which brought more people into its pool of potential clients. In the Charlottesville area, the loan limit for a family of four increased to $817,300.

The FHA loans are also more forgiving of issues in credit scores, one of the requirements that have tightened considerably on conventional, conforming loans. And now that there are little to no more 100-percent financing options out there, old Mr./Ms. Reliable is starting to look pretty good again.