Is the FHA up to the Task?

It was the best of times, it was the worst of times, and the Federal Housing Administration is right in the center of the storm.

Because the FHA has not been a big player until recently, it may be tasked to climb a mountain it simply is not able to climb. Right now the FHA backs nearly $400 billion in mortgage loans, an amount half of what it may have to back in the next year.

Jaret Seiberg, SVP at the Stanford group, isn’t so sure that the agency will be able to handle the gorilla being thrust onto its back.

“We’re asking [the Federal Housing Administration] to fill the gap left by no only subprime lenders, but to be the first choice [of borrowers.] That is an enormous challenge.”

While the FHA has been able to help certain home buyers in the past deal with crisis, the future burden they are facing after all that has happened is likely to be overwhelming. The FHA has not had to deal with such a large number of borrowers facing foreclosures, and they’re not sure exactly how they will best manage any of it.

The FHA provides mortgage borrowers with weak credit and/or no down payment the opportunity for homeownership, i.e., the American Dream, at least how I see it, which is a noble task. The FHA offers insurance to the private lenders which covers them if the borrower defaults on the loan. If the borrower forecloses, the premiums cover the losses.

Because of the gold rush in housing over the past few years, the FHA’s share of mortgages dropped to a record low of 7% of mortgage loans outstanding. Flash forward to 2008 and the FHA is pretty much the only choice for a great many borrowers and lenders, as other financing, even to prime borrowers, has suddenly scaled back if not dried up completely.

Since September, a new program called FHASecure, which is geared towards subprime borrowers facing high mortgage rate resets, has seen sign-ups of about 150,000 borrowers.

While politicians figure out the best way to help Americans facing foreclosure, the interim programs could either help or perhaps drive long-established programs into the ground. I guess time will tell…and as a prospective homebuyer, I just hope i’m able to afford my nice new home. According to my credit report, I’ve earned it. But i’m not so sure that’s going to fly any more.