As dismal as many home builders' sales numbers were in the past year, imagine what they would have been like without government-insured FHA loans. Many home builders report that the FHA loan program, which provides buyers with affordable financng options and is backed by HUD, has been a savior in the wake of the conventional lending crisis. Without the FHA program, many would have had to sacrifice sales at a time when every sale is critical.
The dollar value of FHA-backed home loans issued in the first six months of FY2008 was 62.5 percent higher than the same period in 2007–$26 billion compared to $16 billion. Alhough all of that wasn't new-home financing, much of it was. New homes made up roughly one out of every 10 homes sold in the past year.
That said, the labor-intensive, sometimes cumbersome lending program has required builders and loan underwriters to make some adjustments. Those who worked with FHA in the past have had to reacquaint themselves with the program's quirks; those new to the program have had a lot to learn.
The most obvious effect has been a return to the days when getting a loan to buy a house took time, some hoop jumping, and a significant stack of paper. For example, the program mandates that FHA-approved appraisers be used to evaluate a home, and they are required to look at a property in person to measure rooms and assess potential safety hazards, among other things.
Borrowers who rely on FHA loans take on a greater burden of proof to show they are employed, have money in the bank, and have a credible source for their down payment.
Underwriters are having to learn or relearn how to spot a potential approval problem before the application is submitted and remedy it ahead of time for the best results.
"When they say they want to know what happened over the past two years, they really want to know," says Sheryl Miesel, vice president of Hammersmith Financial, Royce Builders' finance arm. "They want tax returns and W-2s, verification of bank statements, full third-party verification."
A few years ago, 30 percent or fewer of Hammersmith's loans were FHA-backed. Now, that percentage is somewhere between 80 and 90 percent, according to Miesel.
"We always did government loans," she says. "For us it was just rolling back four years and doing what we used to do."
That doesn't mean it has been easy. For instance, FHA requires full blueprints for every house it finances. That adds extra expense, time, and paper. "But you do what you have got to do," Miesel notes.
Indianapolis-based C.P. Morgan has experienced a similar jump in the percentage of FHA-backed loans used by its buyers, climbing to over 80 percent in a year, says CEO Thomas W. Eggleston.
"It's a longer, more cumbersome, far more detailed information gathering process," he explains. The need for blueprints is not an issue for C.P. Morgan since it already creates a blueprint for each of its homes. A bigger problem, however, is finding lenders with underwriters skilled in the process.
"Some lenders are very good, and for others it's hard to adjust," Eggleston says. Good underwriters can spot a problem in an application that is likely to lead to denial ahead of time and work to get the problem resolved before submission.
Because of the higher loan limits now available through FHA financing, C.P. Morgan is considering raising its average sales prices, according to Eggleston.
"You can look at communities and see if there is an underserved segment under that price point, and then you can come in with an FHA lender who is experienced and submit a product that is in that price range," he says. "There aren't many examples of good things now, but that's one."
For Florida-based Holiday Builders, the movement back to FHA financing for between 70 and 75 percent of its buyers' loans has been a blast to its past before the bubble. "Prior to the major housing boom, we were probably 70 to 75 percent FHA financed; we are now back to the exact same point," says CEO Kim Shelpman. "You pull out your old files, blow off the dust, and reacquaint yourself with the FHA guidelines. It's much more complex."
So complex that it can affect home details down to the grade of carpeting FHA requires in the houses it finances.
But for Shelpman, FHA-approved loans in her backlog give her peace of mind because the approval process is so vigorous, there's less chance of a deal falling through at the last minute. That's been a problem with conventional financing as lenders have been changing the rules mid-process due to the volatility of the market.
"If I look down my list [of upcoming closings] and I see a lot of conventional loans, I feel better about it," Shelpman says.