More home buyers are seeking mortgage loans backed by FHA guarantees.

I have been looking at lending patterns in my own community – Durham, North Carolina – and the 2009 numbers paint an interesting picture that suggests a dual marketplace. One group – white and Asian borrowers – continues to eschew the FHA program in favor of conventional loans. Another, made up almost entirely of African-American borrowers, is turning to the FHA program. What is more interesting is the extent to which the sudden switch is unaffected by borrower income. Even well-off African-Americans are flocking to FHA.

I ran a chi-square that sorted borrowers by their race or ethnicity and by their incomes. Incomes were separated (more…)

The Big Banks have suddenly decided to move traditionally underserved borrowers into loans guaranteed by the Federal Housing Adminsitration (FHA).

For years, FHA lending made up only a small fraction of mortgage loans. One source quotes a Wells Fargo representative who says that FHA lending made up only three percent just a few years ago.

The main difference between FHA loans and conventional products is that there is a lower down payment requirement. FHA asks for a downpayment of at least 3.5 percent. Conventional loan terms fluctuate, but in the past year most borrowers have had to put up at least 20 percent in order to buy a home. For investors the number has been much higher.

FHA counters the risked posed by higher LTVs by requiring borrowers to purchase mortgage insurance at the outset of the loan, and to pay a premium for new insurance for as long at the LTV remains at a certain level. The result is that FHA loans, while bearing the same interest rate, will usually have a much higher APR.

There are other appeals for an FHA loan. Third parties (home builders, relatives, employers, non-profits) can contribute to the down payment. On the other side, sellers are allowed to contribute to closing costs.

Things have changed dramatically since the credit crisis. One of the interesting things is that there has been an improvement in the kinds of borrowers that use FHA. According to HUD, the average credit score for an FHA loan  went up from 621 in early 2008 to 692 by the middle of 2009. Do the math: that is a gain of more than 70 points!

Some lenders appear to have made a strategic decision to make loans to underserved groups through FHA. The table that follows lists twenty banks from the S&P 900, along with the share of loans that they originated through FHA. There are four segments: minority borrowers, low-income borrowers, low-income neighborhoods, and rural loans.  

The Big Banks are Making their Loans through FHA

The Big Banks are leading the charge. These top ten are most of the largest banks in the country. Citigroup is an absence, but they have pulled back in mortgage lending.

This analysis includes both FHA and conventional loans on site-built homes. Only loans by owner-occupants are included. There are no home equity loans here – only purchase and refinance loans.

Other observations:

Some banks rely on FHA in rural areas. Fifth Third scored high on this list because they are so dependent upon FHA outside of the cities. It is the same story with M&T Bank. Astoria Financial has a high score, but it can be discounted due to sampling size.  Almost all of AF’s loans are made in the New York metro area.

The big bank that isn’t relying on FHA? BB&T. The Best Bank in Town makes plenty of loans, but they’re not going after the FHA borrowers. For a long time, BB&T has insisted that they are happy to walk away from loans. Maybe their thinking is that they don’t want to let a guarantee push them into making a loan that they otherwise wouldn’t originate.  

A few banks are making almost all of the FHA loans. When the numbers show that JP Morgan, Bank of America, and Wells Fargo are active in FHA than are other banks, then it follows that their share of the market is very large.  These three banks accounted for 79 percent of FHA loans to minority borrowers.  Throw in SunTrust and Fifth Third, and five banks make 90.3 percent of FHA loans to minorities. For low-income borrowers and loans made in low-income neighborhoods, the top five’s share is nearly as dominant – 85.7 percent and 83.5 percent.

This leads into another issue. Rural lending is not the province of small town banks. There are about 60 lenders in this analysis. The big five had 73 percent of all FHA in rural areas, and 55.6 percent of all conventional loans.

The Federal Housing Administration has decided to rethink how it protects itself with a new guidance last month. The new rules have implications not just for borrowers, but also for private mortgage insurance companies.

The new rules, known as the Loan Level Pricing Adjustments (LLPA – pdf here), say that most FHA borrowers will now have to pay an upfront premium of 150 basis points on the amount of their FHA loan. Subsequently, they will be expected to pay another 50 basis points each year. That second charge is paid with the monthly payment.

One analyst at a private mortgage insurance company called me to tell me how much of a difference this will make for his company. He paints a tough picture for the market in the last year: the private firms were being squeezed by the low rates at FHA and the high origination fees built in to (more…)

In 2009 and 2010, lenders have flocked to the  guarantees offered by the Federal Housing Administration‘s loan program.

I have seen the first hints of that trend in Home Mortgage Disclosure Act data that I pulled from some of the bigger banks. FHA lending is way up. This is not just a reflection of how those guarantees appeal to lenders. It also shows something about the ability of buyers. FHA loans often come with higher origination fees. Nonetheless, many borrowers can only qualify for an FHA loan, because they do not have the down payment that is needed for a conventional loan.

Up until the end of the first-time homebuyer tax credit, home sales were slow. Now, they are sputtering. The supply of homes on the market is growing, and the number of sales is (more…)

Taylor, Bean, and Whitaker has closed down, a decision which reflects the growing role of the Federal Housing Adminstration (FHA) loan program.

TBW quietly became a dominant player in the mortgage market.  They were the twelth largest mortgage originator and the nation’s tenth largest mortgage wholesaler.  They were privately-owned, which may account for why they had such an under-the-radar reputation.  They did most of their business through brokers and other channels.

The FHA temporarily suspended its relationship with TBW on Tuesday.  The Government National Mortgage Association (Ginnie Mae) also said that it would no longer allow TBW to issue (more…)