'Going FHA' Back in Vogue

Posted: August 26, 2007

As the mortgage industry goes through a wrenching retrenchment, government-backed loans for first-time homebuyers and borrowers with credit problems are coming back into favor.

Hatfield resident Michael Hardisky, for example, had been considering various exotic mortgages designed to keep monthly payments low - at least initially - to buy a first home, a condo in Telford, with his fiancee, Jennifer Rambo.

"I wanted to do an interest-only, but my parents and my fiancee's parents advised against that," said Hardisky, 29, who was worried about juggling his bills on a public-school teacher's salary.

Hardisky, who teaches science at Lankenau High School in the Andorra section of Philadelphia, settled on a $150,000 mortgage through Gateway Funding in Horsham that will be insured by the resurgent Federal Housing Administration.

Through July, the FHA insured 5,968 loans in the Philadelphia region, 30 percent more than during the same period last year.

The agency's market share here, in dollar terms, had fallen from 9.2 percent in 2001 to 1.8 percent in 2005, the last year detailed federal home-loan data are available. Nationally, the FHA's market share had tumbled from 5.3 percent in 2001 to 1.9 percent last year, while subprime mortgages soared from 7.2 percent to 20.1 percent of the market over the same period.

"Our pockets were picked in a sense during that period of time," said Engram A. Lloyd, director of the FHA's Philadelphia Homeownership Center, which is part of the U.S. Department of Housing and Urban Development and covers 15 states.

Lenders said the subprime and exotic-mortgage boom - with 100 percent financing and no proof of income - was the biggest factor in the FHA's decline. Similarly, the renewed popularity of FHA loans, "has more to do with the subprime fallout than with the changes they made" at FHA, said Gary Gordon, senior vice president and retail underwriting manager at Sovereign Bancorp Inc.

Others say Fannie Mae, a government-sponsored company that buys mortgages from lenders for resale on the secondary market, also eroded the FHA's market share by developing programs for borrowers with less-than-perfect credit.

Since the beginning of 2006, the FHA has fought to regain market share by streamlining the appraisal process, eliminating restrictions on closing costs, adopting electronic processing, and allowing lenders to do their own insurance approvals, with spot checks to ensure sound underwriting.

"They've standardized it, and it's gotten a lot better," said Bob Angelucci, president of Cardinal Financial Co. in Warminster. Cardinal boosted its FHA business from $45 million in loans in 2005 to $79 million last year and is on pace for $92 million this year.

Further modernization is under consideration in Congress. A bill, which passed the House last year but stalled in the Senate, would increase the FHA's loan limits, allow the FHA to use credit scores to set premiums for its mortgage insurance, lengthen the maximum loan term to 40 years, and allow 100 percent financing.

Last week in Washington, political pressure was building to modify the FHA so it can be used to help struggling borrowers avoid foreclosure by guaranteeing refinancings of mortgages that are in default.

The FHA was founded during the Depression to stimulate private lending for construction and home repair. The FHA, which became part of HUD in 1965, does not lend money. It provides insurance - paid for by the borrower - on loans that meet its standards.

Those standards - including onerous appraisals and inspections that forced sellers to fix things as minor as a loose handrail or a leaky faucet - made the FHA "pretty difficult to work with," said Bruno Pasceri, president and chief executive officer of Gateway Funding Diversified Mortgage Services L.P.

That has changed, but many real estate agents still assume the old rules remain and try to reject FHA loans, said Pasceri, who experienced that this month when his daughter and her fiance were buying their first house with an FHA loan.

"Right in front of my eyes, they were going to not accept her offer based on having an FHA," Pasceri said. After Pasceri explained that FHA had adopted Fannie Mae appraisal and repair standards, the offer was accepted.

From Gateway's founding in 1994 through 2000, about half of the privately owned lender's business was in FHA mortgages, Pasceri said.

FHA's market share at Gateway fell to as little as 7 percent of Gateway's monthly business last fall, but was up to 17 percent in July, he said.

"We want it to be a little higher." he said.

The company - and the FHA - may get a boost from the wave of adjustable-rate mortgages that are resetting to higher interest rates this year and next. Nationwide, about $500 billion in so-called hybrid adjustable-rate mortgages are scheduled to reset in the remainder of this year and next, with an average increase in monthly payments of 30 percent, according to the investment bank JPMorgan Chase & Co.

"We are in a position to reach a lot of those folks whose loans are resetting," said Engram, the FHA official in Philadelphia.

"The market is just ripe right now because people are feeling strapped in these products," he said.

Even so, first-time homebuyers, such as Jean Howley, 44, remain a big part of the FHA mission.

A mortgage broker at GMAC in Horsham steered Howley, a divorced mother of two, toward an FHA loan for a house in the city's Tacony section because she didn't have much money for a down payment. An FHA loan requires as little as 3 percent down, and all of that can be a gift or a grant.

In April, she borrowed $71,435 at a 6.75 percent annual percentage rate.

"It was like signing my life away," she said, but she doesn't regret it. "It's my home. I love it."


Contact staff writer Harold Brubaker at 215-854-4651 or hbrubaker@phillynews.com.

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