Bill Renner knows exactly when access to government-insured mortgages became essential to the survival of home building companies around the country. That would be March 2008, when Congress passed an economic stimulus bill temporarily raising the loan limits for FHA-insured loans to as high as $729,750 in some parts of the country, more than twice as high as before.
“Because loan limits had become so far away from prices in markets like California, builders did not even think of FHA,” says Renner, director of single-family finance at the NAHB. “This opened these markets back up to the use of FHA, and I got calls from builders turning to FHA, asking, ‘What are these new requirements?’” That’s a reasonable question—but it also indicated just how much FHA’s market share had shrunk during the boom. “FHA hadn’t added any new requirements since 1996,” Renner says. “These guys hadn’t used FHA since the ’80s.”
Times have changed. Subprime loans have slunk back into the darkness, but with banks clinging to cash like a lifeline, conventional mortgage financing has disappeared even for creditworthy borrowers. “This is the tightest lending environment I’ve ever seen, and I’ve got 27 years in the business,” says Dan Klinger, president of K. Hovnanian American Mortgage, the financial services division of public builder Hovnanian Enterprises.
That tightening has resulted in a tremendous expansion of FHA in terms of the number of home loans endorsed, dollar value of mortgages insured, and its share of the overall mortgage market. For better or for worse, FHA has become an essential source of mortgage financing during this housing slump, nearly tripling the dollar volume of home mortgages that it insures between 2007 and 2008 alone, to more than $102 billion. Such growth worries industry watchers who aren’t persuaded that builders, lenders, and others have truly sworn off the practices that created the now-deflated housing bubble.
Irrelevance to Dominance
As recently as 2004, though, FHA’s sinking market-share numbers had even government employees questioning whether their agency, established in 1934, had become unnecessary.
“Our market share was dropping precipitously,” remembers Meg Burns, director of FHA’s office of single-family finance. “We thought, ‘If people can get prime-rate financing without government insurance, that’s a great thing.’”
So they decided to research the issue. What FHA uncovered—that borrowers who could have qualified for FHA loans at prime-level interest rates were instead choosing more-expensive subprime products—was largely ignored in 2005, when agency staffers testified at a hearing about their subprime findings and concerns. Meanwhile, FHA market share continued to fall, sliding to a low of 5 percent in 2006 for new-home purchases.
What a difference two years can make. For 2008, FHA projects a new-home market share of almost 13 percent, and the percentages are much higher for some home building firms. At CTX Mortgage, which serves Centex Homes buyers, 60 percent of its loans are FHA-insured. Klinger expects even higher figures at Hovnanian, where he says 60 percent to 68 percent of his loans will be FHA. “During the boom, we did 90 percent conventional and 10 percent government loans,” says Kim Shelpman, president of Holiday Builders in Melbourne, Fla. “Now it has completely flipped.”
Learn more about markets featured in this article: Manhattan, KS.