FHA Loans Emerge From the Sidelines

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FHA Loans = Emerge From=20 the Sidelines

By Dina ElBoghdady
Washington Post Staff = Writer
Tuesday,=20 June 10, 2008; D01

For the past few months, nearly every loan that Laura Triplett has = closed for=20 customers at SunTrust Mortgage has been backed by the Federal Housing Administration.

"I've got another 20 people closing in June and most of them got FHA = loans,=20 too," said Triplett, a branch manager at the bank's Woodbridge office. = "I don't=20 know what we'd be doing without FHA."

Demand for these once-neglected mortgages has surged because they do = not=20 require the hefty down payments or stellar credit scores that lenders = have come=20 to expect from borrowers. In addition, the amount of money people can = borrow on=20 these loans went up dramatically this year, and many homeowners have = found them=20 attractive for refinancing.

They might not be the cheapest loans around, but they are the best = fit for=20 some borrowers -- and the only option for others -- as lenders continue = to=20 toughen their standards in response to the subprime meltdown.

The number of FHA loans issued shot up 126 percent in the first = quarter,=20 compared with the same time a year ago, even though they still make up a = small=20 part of the market. They have made the biggest gains in pricey areas = such as=20 Washington, where the down payment other loans require is out of reach = for many=20 borrowers.

David H. Stevens, president of Long & Foster's affiliated = businesses,=20 said his real estate brokerage now holds regular FHA training sessions = for its=20 agents and the loan officers at its in-house lender, Prosperity = Mortgage.

"Our FHA business in the Washington area went from virtually nothing = at the=20 end of 2007 to about 30 percent today," Stevens said. "In some spots, = FHA makes=20 up 50 percent of all our loans."

The volume of loans at Wells Fargo, one of the nation's largest = lenders, has=20 increased 342 percent this year from the same time in 2007, said Greg = Gwizdz,=20 the company's national retail service manager. Helping drum up business = were=20 live simulcasts for real estate agents that the lender recently held in = movie=20 theaters nationwide touting the benefits of FHA loans.

Many attribute FHA's growth spurt in part to federal legislation that = has=20 temporarily raised the FHA loan limits nationwide, broadening the number = of=20 people who can use these loans. In most parts of this region, the limit = is now=20 capped at $729,750, up from $362,790.

The change, which took effect in early March, came just in time for = Abby and=20 Walter Morris.

The couple had made an offer on a house in Chevy Chase. But their lender yanked the loan at the = last minute,=20 citing concerns about their finances, the couple said.

Abby Morris, a doctor, had just completed her residency. Her earning=20 potential was huge, but her medical school loans and her lack of = long-term=20 employment made the lender squeamish.

"We didn't have a stash of money in the bank or stocks to cash out," = Abby=20 Morris said. "We were depending on our income potential and our history = of=20 on-time payments to help us qualify for a loan."

When that didn't happen, the couple planned to withdraw their offer = until=20 Kerry White, a loan officer at Prosperity Mortgage in the District, told = them=20 about the new FHA loan limits.

"A year ago, this couple would have had no problems getting = financing," White=20 said. "But because of the tightening mortgage climate, their loan = options dried=20 up. . . . FHA became an obvious alternative."

The FHA does not lend money directly. It provides mortgage insurance = to=20 borrowers through private lenders. That means the FHA will pick up the = tab for=20 defaulted loans using premiums it collects from all of its = borrowers.

The agency lost relevance when home prices soared and borrowers = turned to=20 subprime loans with lower upfront costs. When those loans started = defaulting at=20 an alarming rate, many subprime lenders shut down and the FHA started = slowly=20 regaining its footing. Its market share is now about 10 percent, up from = 2=20 percent in 2005, according to Inside Mortgage Finance, a trade = publication.

Most of FHA's business now comes from refinancing. During the first = three=20 months of this year, nearly 60 percent of the 15,000 loans that FHA = insured in=20 Maryland and Virginia were for borrowers who were refinancing, federal = data=20 show. Some of them turned to FHA to get out of loans that were becoming = too much=20 to handle.

Among them was Petrina Chesson, who was anxious to get rid of a = burdensome=20 subprime adjustable rate loan. She got that mortgage two years ago and = pulled=20 out cash for improvements on her D.C. townhouse.

But the loan's interest rate reset last month, and her monthly = payments=20 climbed to $3,497 from $3,069. Chesson never fell behind on her mortgage = but=20 feared she would.

"Things were getting tight, and I was getting worried," Chesson said. = "I just=20 wanted a 30-year fixed loan, and no one would give it to me until Bank of America helped."

Her new loan will consolidate her other debts so that her total = monthly=20 payments will be $3,290. Her mortgage makes up $3,002 of that total.

Although the FHA is starting to recapture borrowers it lost to = subprime=20 lenders, its loans do not have the features that drew borrowers to = subprime=20 loans but later turned problematic.

Only borrowers who can make at least a 3 percent down payment or have = at=20 least 3 percent equity in their homes and who can document their income = can=20 qualify for FHA loans.

By contrast, many subprime loans did not require down payments or=20 verification of income. They also charged expensive prepayment penalties = that=20 made it tough for borrowers to refinance. FHA loans do not allow such = fees. Most=20 FHA loans have fixed interest rates; subprime ones typically have rates = that can=20 rise.

Douglas Vazquez, 30, knew none of that when he applied for an FHA = loan. "I=20 was more like, 'FHA? What's that?' " Vazquez said.

All he knew is that he could not afford the 10 to 20 percent down = payment=20 many lenders demanded as he shopped for a condo, nor could he qualify = for a loan=20 without a co-signer.

An FHA loan worked for him because of the low down payment and = because it let=20 his mother, a non-occupant, sign on his loan, something many = conventional loans=20 do not allow.

The paperwork was a hassle, said Vazquez, who purchased a D.C. condo = for=20 about $400,000. "They required pay stubs from both of my jobs. They = required=20 statements from checking accounts. They wanted tax returns. They would = call my=20 employers. . . . They called my mother," Vasquez said. "But it was worth = it."

These glowing reviews stand in sharp contrast to past criticism of = the FHA,=20 which was previously bashed by lenders and borrowers alike as too = cumbersome.=20 Now, complaints center on whether the agency can handle its growing=20 workload.

Guy Cecala, publisher of Inside Mortgage Finance, said the FHA = remains=20 bureaucratic. "But if your choice is vanilla ice cream or no ice cream, = vanilla=20 starts looking good."