FHA needs a bailout?

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I ran across this article by The Economist last week. It raises a valid point, and provides some insight into why FHA has made changes to their guidelines over the past few years. The one thing to know is that FHA loans do not need a bailout – for now. That is also the opinion of this article.

For the full article, please use this link. For a quick summary of the points:

  • FHA loans were intended to help people to secure home loans coming out of the Great Depression
  • FHA loans were a niche program until they began losing market share to subprime lending in the early 2000’s
  • when the housing market crashed, borrowers looking for subprime loans turned to FHA loans to purchase homes
  • In 2006, FHA insured loans of $52 billion. That figure increased to $330 billion by 2009. As you can see, FHA did become the new subprime loan program as I personally blogged about in 2008.
  • FHA now has some “dicier” loans, which is why the guidelines have increased with minimum credit scores and increases to monthly mortgage insurance rates
  • As long as there is not a double dip recession, it appears FHA will be OK and not in need of a bailout.

The one aspect the article ignores is going into detail about mortgage insurance. The upfront premium was increased from 1% of the loan amount to 1.75% of the loan amount. The monthly premium has increased 5 times in the past few years.

For all of you who ask “why is FHA continuing to increase its monthly mortgage insurance premiums?,” this article sheds some insight. It is to ensure FHA continues to operate and not need a bailout as it fully guarantees billions and billions of Dollars worth of loans from the U.S. housing market. The increase of premiums are designed to keep the coffers full to cover the losses from foreclosures on FHA insured home loans.

I hope this has provided some insight into FHA loans and the reason for all of the guideline changes over the past few years.

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