If you're hoping to refinance, the latest news about the housing market has been heartening. Current mortgage rates for jumbo loans are near four-year lows, with mortgage rates on conforming loans even lower. Moreover, home prices in some areas have risen over the summer of 2009, making it easier for some homeowners to qualify for a refinance according to the all-important loan-to-value ratio.
However, rumblings that the Federal Housing Administration (FHA) may be in financial trouble may hurt those with little equity who are considering refinancing.
FHA Problems Hurt More Than Just First-Time Home Buyers
The FHA guarantees loans, enabling banks to make home loans they wouldn't make if they had to bear all the risk of default themselves. Created in 1934 to help lower- and middle-income Americans purchase homes, the FHA is known for guaranteeing home loans with low down payments -- as low as 3.5% down, in fact.
But now, according to experts testifying before Congress, a large portion of the home loans insured by the FHA in recent years -- 20% of loans made in 2008 and 24% of those in 2007 -- are facing foreclosure or other serious problems. These troubled loans are placing a strain on the FHA's diminished capital reserve, with some watchdogs convinced that the agency may be headed for a bailout.
First-time home buyers are common users of FHA financing, but they're not the only group that could be affected by an FHA meltdown. The FHA also insures refinances for borrowers in tough financial straits or in need of cash.
Some Prospective Refinances Can't Sustain Home Price Declines
FHA problems matter to homeowners considering refinancing, not just to first-time home buyers, because first-time home buyers have been propping up home prices over the last six months. Currently, the FHA is insuring about 6,000 home loans per day, four times the amount in 2006. In some struggling markets, real estate agents are reporting that nearly all their clients are using FHA loans. If the FHA needs to pull back or tighten criteria -- for example, increase its down payment requirement -- a lot of home buying stops, creating downward pressure on prices. (Some FHA programs are already tightening. For example, the FHA offers streamlined refinancing for those who already have an FHA loan, but these streamline refinances are subject to more stringent rules as of January 1, 2010.)
For borrowers looking to refinance, both trends -- especially the FHA deterioration, which is a result of structural factors rather than policy decisions -- could drive down home prices. Lower home values make it harder for existing homeowners to refinance because they translate to less favorable loan-to-value ratios.
FHA problems are bad news for all home loan borrowers. If you are considering refinancing, keep a close eye on the news about the FHA.
About the Author
Andrew Freiburghouse is a writer and a businessman. As a partner at Los Angeles tax preparation firm Pronto Income Tax of California, Inc., Andrew has advised thousands of clients on a variety of financial matters.
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