FHA feeling strain of becoming main game in town for many borrowers

In the current credit squeeze, if you have a down payment of less than 20 percent, there's pretty much only one major source of mortgage financing available: FHA, the Depression-era home-loan-insurance agency that still offers 30-year fixed-rate mortgages with 3 percent down and consumer-friendly credit standards, even on jumbo loans in high-cost areas.

But there is a potentially troublesome problem looming for FHA.

New loan volume is exploding — tripling in the past 12 months — and Congress just handed the agency the responsibility for virtually all the government's efforts to keep economically distressed homeowners out of foreclosure by refinancing their current, unaffordable loans.

FHA says it needs to hire more staff and upgrade its technology to handle the crush of new business. But it says Congress hasn't appropriated the necessary money — $65 million — to do the job fast enough.

Capitol Hill appropriations-committee staff dispute some of that, but the specifics of the arguments over dollar amounts aren't the issue.

The real question is this: Can a federal agency whose market share fell below 3 percent during the heyday of the subprime boom properly handle explosive volume that will give it 10 times that market share? Are the agency and Congress, which controls the purse strings, up to the task?

Mortgage-industry, homebuilding and real-estate experts worry about the possible consequences of shifting too heavy a share of the mortgage market too quickly to an agency that may be understaffed or underfunded.

Howard Glaser, who served as acting general counsel for the FHA's parent, HUD, during the Clinton administration, worries it raises the odds of future breakdowns.

"FHA is assuming the risks of a mortgage market abandoned by private investors — without the risk-management tools," he said. "My fear is that next year at this time, we will be debating an FHA bailout."

Steve O'Connor, senior vice president of the Mortgage Bankers Association, agreed that danger lurks in the lack of staff and need for upgraded technology at FHA.

"You just can't expect to fit that amount down the same size pipe," O'Connor said. "You've got to expand the size of the pipe. It's a very serious concern."

The National Association of Home Builders and the National Association of Realtors have similar worries.

Dick Gaylord, president of the Realtors group, said that if FHA is going to serve its growing constituency, its staffing and funding need to expand.

FHA — for years the forgotten, federally controlled stepchild of an industry dominated by Fannie Mae, Freddie Mac and the Wall Street mortgage-bond machines — is now insuring more than 140,000 new loans a month, agency statistics show.

It has $400 billion in outstanding loan balances in its insurance portfolio and runs its home-mortgage business with 937 employees in offices spread around the country. The agency wants authorization to add 160 employees immediately.

Although historically a resource for first-time buyers, minorities and consumers with imperfect credit, FHA increasingly is the go-to place for people who have above-average credit backgrounds but lack, or choose not to use, large amounts of down-payment cash.

In August, agency data show, about 23 percent of all new FHA homebuyers had FICO credit scores above 720 — far beyond the proportion of prior years. In the same month, 12 percent had FICO scores below 600.

With mortgage limits extending into the jumbo category, the agency is attracting large numbers of customers from high-cost areas of the country, especially California and the Middle Atlantic states. One in 10 new borrowers in August was from California.

To some mortgage lenders and loan officers, FHA is the main game in town.

"Nothing competes with them," said Paul Skeens, CEO of Colonial Mortgage Group in Waldorf, Md.

Fannie Mae and Freddie Mac, both in federal conservatorship, have steadily added fees to the point where "they just aren't competing with FHA on down payments or costs," Skeens said. In 2001 and 2002, Skeens' firm did just one-quarter of 1 percent of its volume in FHA. Now, it's 60 percent.

"The last thing we need right now, with the shape the housing market is in, is for FHA not to function well," he said.

Kenneth R. Harney: kenharney@earthlink.net