What's What

Fewer roadblocks at the FHA for buyers, lenders

Federal agency cuts paperwork, streamlines inspection procedures and raises the limits on home mortgages.
By Lew Sichelman, United Feature Syndicate
June 25, 2006

WASHINGTON — For anyone who has ever been told that government-backed mortgages are too much trouble, Martha Simmons has one word: poppycock.

That might have been the case a few years ago but not anymore, says Simmons, national retail production manager for SunTrust Mortgage in Richmond, Va. Simmons says the Federal Housing Administration has undertaken several significant changes in the last 12 months that have turned the agency into a more efficient lending machine.

Among many improvements, the FHA has raised its loan limits, albeit not as much as the agency and lenders would have liked; moved away from onerous repair and inspection requirements; and generally retooled the entire lending process to make it less cumbersome for borrowers and their lenders.

Borrowers are still wise to obtain conventional mortgages with private mortgage insurance, if they can. But for those with less-than-spotless credit, FHA-insured loans might now be the next best choice.

"When they can get a better price, we want them to take it," says Meg Burns, director of the agency's office of single-family program development. "We are targeting those who can't."

In the past, the government's housing program has missed that target badly. So badly that the FHA's market share shrank from 13% of all loans in 1990 to 3.5% last year.

For much of that period, the slow-moving agency was a sitting duck for more nimble sub-prime lenders offering the hottest new loan products with the quickest approval times.

Never mind that the slick-talking sub-prime guys charged higher rates.

Forget that they did little to help borrowers who found themselves in financial difficulty after they closed on their fancy loans and moved into their new digs.

As long as people qualified for a sub-prime loan, they didn't even consider the FHA — and neither did their real estate agents, who, Simmons says, discouraged buyers from going to the FHA because it was too inconvenient and unmanageable.

Unfortunately, many agents still cling to that belief. And agents, as trusted advisors in the home-buying process, hold sway over a lot of people.

But today's FHA is different. It is waiting for federal lawmakers right now to clear legislation that would, among other things, allow the agency to base its premiums on the risk would-be borrowers represent to the insurance program, allow greater flexibility in determining the down payment — including a zero-down option — and boost its loan limits.

FHA Commissioner Brian Montgomery is convinced these changes will "make us a real player in the mortgage market again."

At the same time, though, the agency hasn't exactly been sitting around waiting for something to happen. Here's a brief recap:

In January, it raised its maximum loan limit by nearly $50,000, to $362,790, in the nation's most expensive markets. The ceiling was bumped to $220,160 practically everywhere else.

The maximum still isn't high enough in places like California, where the FHA insured 51,000 loans in fiscal year 2005, down from 109,000 in fiscal 2000, or Maryland, where it backed only 5,400 loans in fiscal 2005, versus 31,000 in 2000.

The FHA is asking lawmakers to raise the lid in high-cost markets to $417,000 this year and possibly even higher in subsequent years.

But $362,790 isn't exactly pocket change. With 3% down, it's enough to buy a house priced at $374,010.

And although that isn't even the median price in places like Los Angeles, San Francisco and San Diego, there are still plenty of houses changing hands at that amount or even less.
The agency also has streamlined its operating procedures in several ways to make them more compatible with the conventional loan process.

In what the FHA's Burns calls the most significant change in a year of change, the agency no longer requires lenders to submit inch-thick binders of documents supporting every single loan transaction.

Now, lenders are permitted to perform file reviews on their own, submit data electronically to the FHA and endorse the loan on the spot without waiting days or even weeks for a nod from the government. If the agency should request a case file for post-endorsement review, that file also can be sent electronically.

"Lenders have really responded," says Montgomery, noting that nearly half the loans insured by the agency since the change was implemented in January have been processed this way.

Also in January, the agency made serious fixes to its appraisal protocols, moving away from what the FHA commissioner admits were "unique" and "onerous" inspection and repair requirements.

"In essence," Montgomery says, "we adopted the industry standards."

That means no more Home Buyer Summary, a laundry list of blemishes and flaws intended to give would-be owners a true and complete picture of the house they were buying — which also served to frighten many of them away. And no more Valuation Conditions form, listing items that required fixing.

The agency still requires appraisers to note all conditions affecting the property's value, but further inspections and repairs are called for only when a defect is structural or when it would affect the health and safety of the occupant. Consequently, sellers are no longer compelled to repair cosmetic items like a cracked windowpane.

Industry consultant Bud Carter, senior vice president of Potomac Partners in Washington, D.C., calls these and other improvements "a major step in the right direction."

And even if Congress fails to approve the additional changes the FHA and lenders are seeking, he believes the agency has done enough in the last year to get itself back on track.

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