A great deal of misinformation is being circulated about the Federal Housing Administration's (FHA) single-family mortgage insurance program. It's time to set the record straight.
FHA, part of the U.S. Department of Housing and Urban Development, represents the best, and in many cases, the only, route first-time buyers can take to achieve homeownership.This program is designed to provide a source of long-term mortgage financing to homebuyers in all parts of the nation - buyers without other sources of financing. But, rising home prices in many communities have effectively cut off families in those areas from access to FHA mortgage insurance. This has left many middle-income Americans without a practical alternative to the stringent financing requirements imposed by the private mortgage insurance industry.
The biggest home-financing obstacle first-time buyers face - raising enough cash to make a down payment - often is compounded by having insufficient income to qualify for a mortgage. FHA's down payment requirements and loan qualification requirements are more suited to the needs of first-time buyers than conventional loan requirements.
We are fully aware of the low-down payment programs announced by the conventional mortgage industry. While development of these plans is an encouraging sign, these programs must be placed in perspective. They are new products that simply are not available in most markets - they lack the national reach of FHA.
Reasonable, responsible changes to the FHA program, which have been approved by the U.S. House of Representatives, could dramatically improve homebuying prospects for prospective buyers nationwide - buyers whose buying needs are not being met by the conventional market. The changes would adjust the mortgage ceiling on FHA-insured loans to more adequately reflect conditions in high-cost markets and raise the base loan amount insured by FHA. Specifically, the maximum mortgage insurance limit would rise from $151,750 to $172,678; and the base loan amount would rise from $67,500 to $101,575.
Adjusting these loan limits will make the FHA mortgage insurance program fair, by allowing moderate-income families in high-cost areas to have the same homeownership opportunities as their counterparts in less expensive areas of the nation. Keeping the program's loan limits unrealistically low does not allow FHA to keep pace with home price increases. As a result, families who could buy under FHA guidelines are unable to use the program, because its mortgage insurance does not adequately cover home prices in their area.
The impact of raising the maximum and base loan limit is dramatic. NAR's research shows that raising the base would enable more than 1.4 million additional households nationally to purchase a home using FHA. Raising the maximum loan amount would permit more than 276,000 additional households nationally to buy.
Critics of this proposal, led by the private mortgage insurers, have charged that a higher FHA mortgage insurance limit would serve only higher-income borrowers, and thus violate the spirit of FHA's mission. This argument ignores the statutory origin of FHA's single-family mortgage insurance program.
The program was never intended to be a low-income subsidy program nor has it been targeted solely to families falling below a certain income range. Created by the National Housing Act of 1934, FHA was established in response to the general lack of available mortgage insurance during the Great Depression. Economic and political forces have modified FHA's single-family mortgage insurance program over the years. It has become an increasingly important financing tool for entry-level buyers.
Opponents of the proposal for higher FHA insurance limits also charge that the agency's Mutual Mortgage Insurance Fund, which insures the single-family mortgages, would be driven to insolvency by higher insurance limits and lower down payments. Their allegations mask the truth.
Without a doubt, the private mortgage insurance industry is attempting to keep FHA out of high-cost areas, even though private mortgage insurers and FHA generally do not serve the same segment of the market.
Based on FHA's market share and previous experience, it is clear that expanding the program would not undermine the need for a strong private mortgage insurance industry. FHA's role in high-cost markets would bridge the housing affordability gap for people who can't get conventional loans.