By Mary Morrison
December 1, 2011
New Chicago-area loans insured by the Federal Housing Administration fell dramatically last year.
Lenders made 32,413 FHA-insured loans to local homeowners in 2010, down almost 36% from 50,504 in 2009, according to the Mortgage Bankers Assn. That figure includes refinancing loans.
The dollar amount of FHA loans also plunged 38% last year, to $6.4 billion. That represented 12% of all Chicago-area home loans last year, down from nearly 18% in 2009.
The loans accounted for 14.6% of all new mortgage loans in the Chicago area last year, compared with 20.3% in 2009.
Still, the FHA remains a key crutch for a housing market that has been starved for credit since the financial markets crashed more than three years ago. FHA loan volumes are still way up from 2006, when agency-insured loans represented less than 2% of Chicago-area home lending on a dollar basis.
Though the loans have historically benefitted homebuyers with low income or damaged credit, they’ve become increasingly important for moderate-income buyers who don’t have the 20%-plus down payments now required for most conventional loans.
“FHA has been critical in filling the gap and continuing to give homebuyers the ability to access mortgages, especially with low down payments,” said Geoff Smith, executive director of the Institute for Housing Studies at DePaul University.
FHA loan originations may have dropped last year because mortgage activity over the past two years has been dominated by refinancing, said Guy Cecala, CEO and publisher of Bethesda, Md.-based Inside Mortgage Finance Publications Inc., a trade publishing company.
“FHA doesn’t benefit as much from the refinance market,” he said. “Those loans are primarily for home purchases.”
Another reason the number may have dropped, he said, is that the minimum down payment required for the loans increased to 3.5% from 2% two years ago.
Currently, the average homebuyer who gets a standard Fannie Mae or Freddie Mac loan, which account for about 65% of mortgage volume nationally, has a credit score of 760 and puts down 30%, Mr. Cecala said.
FHA loans have higher upfront fees and insurance premiums than conventional loans, but since the subprime loans of the boom years disappeared, FHA has been the only option for some communities where people don’t have pristine credit scores and a lot of wealth, said Katie Buitrago, policy and communications associate at Chicago-based Woodstock Institute.
“Very few people have a 20% down payment available and 750 credit scores,” she said.
In addition to the higher down payments, the FHA now requires a minimum credit score of 580. However, many FHA lenders have imposed their own, tougher standards, so the average credit score for an FHA borrower is around 700, according to Inside Mortgage Finance.
As with conventional loans, FHA lenders are scrutinizing personal financial documents more closely. When newlyweds Dustin and Melissa Landgraf bought a single-family home in Bloomingdale last month for just under $200,000 with an FHA loan, they had to provide bank statements and copies of checks they received as wedding gifts, said the loan officer who handled their mortgage, Tim Corr, vice-president of mortgage lending at Guaranteed Rate.
“They (underwriters) see large deposits going in your bank account and want to know where it’s coming from,” Mr. Corr said.
The Landgrafs were able to put down just 3.5% and get a 30-year fixed-rate mortgage with a low interest rate of 3.75%. The couple, who got married in September, isn’t able to save a lot of money each month in part because of student loans, Ms. Landgraf said, so putting money aside for a 20% down payment would have taken years.
“If we had to go the conventional route, we wouldn’t own a house right now,” she said.
The loans have sparked a larger debate about the FHA’s reserves, with one recently released paper concluding that the agency may need a capital infusion of $50 billion or more in the next few years.
“The downside is that if home prices have declined close to, say, 10% over last three years and the last three years are peak FHA lending period, most of FHA’s mortgages are underwater,” Mr. Cecala said.
Delinquencies on FHA loans have remained fairly constant in the past five years. Though no metro-level data were available, 15.3% of FHA mortgages in Illinois were past-due in the third quarter, according to the Mortgage Bankers Assn., compared with 15.5% in the year-earlier period and 15.1% in the third quarter of 2006. not 2009?
By comparison, the past-due rate for all mortgages in Illinois was 8.5% in the third quarter of this year, compared with 9.8% in the same period last year.
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