Despite years of efforts by the Federal Housing Administration to cut back on red tape, a bias remains against borrowers using FHA financing.
Thousands of properties listed for sale on various Multiple Listing Services around the country say simply: "No FHA" under the description of acceptable financing, lenders and mortgage brokers say.
Some attribute the restrictions to outmoded perceptions about FHA, which in 2005 eliminated some of its strictest requirements on property repairs, home inspections and appraisals. Others say lenders are excluding FHA borrowers from buying short sale or real estate-owned properties because higher default rates on distressed properties could land them on FHA's Credit Watch list.
And observers agree that, though this was not a major problem during the boom years because lax credit standards made it easier to qualify for loans without FHA help, it is a growing concern now that these borrowers make up one-third of the market.
"This is the worst-kept secret in real estate, that the MLS is full of listings that say 'no FHA,' " said Scott Stern, the chief executive officer of Lenders One, a cooperative of mortgage banks in St. Louis.
Rodney Anderson, the executive director and managing partner of Rodney Anderson Lending Services, a unit of the Dallas lender Everett Financial, called the practice "buyer discrimination" and said that it is based on old ideas about the government program.
"There's still a stigma from the old days when FHA required more repairs on properties," Anderson said. "But now FHA works just like conventional loans, and there is a real lack of education out there."
Steve Majerus, the director of retail lending at CMG Mortgage Inc., a San Ramon, Calif., lender, said there are "perceptions that FHA has roadblocks to the entire process." The real roadblock, he said, is sellers who won't accept FHA loans.
Mortgage brokers and lenders said the problem is most prevalent among sellers of homes that require significant repairs because many realty brokers think FHA borrowers will not have the money to cover these costs.
Raffi Tal, the chief operating officer at IShortSale Inc. in Woodland Hills, Calif., said many lenders are also refusing to accept FHA financing for short sales and REOs.
"When a property goes to REO, the lender is really discounting the price, and if the buyer has an FHA loan, it takes longer, so that's why they're discriminating," he said. "The guidelines on FHA are tougher, and if they get multiple offers they don't need FHA."
Majerus said persuading sellers and their listing agents to accept FHA buyers is important because the housing crisis has catapulted FHA into the mainstream. In June mortgages backed by the FHA accounted for 35.9% of all applications, the biggest share since 1990, according to the Mortgage Bankers Association.
FHA mortgages currently are half of all new loans for home purchases, up from 10% in early 2008, according to analysts at Bank of America Corp.
Lemar Wooley, a spokesman for FHA, said the agency has not gotten any complaints from borrowers and was unaware that MLS listings forbid FHA financing.
But Brian Montgomery, a former FHA commissioner who is now a managing director at Collingwood Group LLC, a Washington advisory firm, said real estate agents have complained for years about "the headache factor" in FHA's many requirements.
During Montgomery's tenure, mid-2005 to mid-2009, FHA reformed its appraisal requirements, shifting from an emphasis on minor repairs to those that endanger the health and safety of a home's occupants.
Lenders also are concerned about the ability to close a loan, he said, since housing prices are still falling in many markets.
"If there's something that comes back at the 11th hour and the borrower can't use FHA, then the seller is left holding the bag," Montgomery said.
Angelo Rhea, a first vice president of FHA underwriting at $16.4 billion-asset Flagstar Bank in Troy, Mich., said realty brokers may be randomly adding "no FHA" to MLS listings because they have not kept up with changes made by the agency in recent years.
"Many Realtors think it takes 60 days to close a loan and that the seller has to pay extra costs, which isn't the case," Rhea said. "If anything, it's harming the seller not to allow FHA financing."
The perception that FHA borrowers have lower incomes and credit scores persists even though the average FICO score on FHA loans has risen from 626 to 692 in the last year, said Brian Chappelle, a former FHA official and a partner in Potomac Partners LLC, a mortgage banking consulting firm.
"If you're loaded up with REO properties and they're putting 'no FHA' loans on the listing requirements, it's because they're concerned about the audit risk," Chappelle said.
Lenders may be at risk of being placed on the FHA's Credit Watch program if they have high default rates in certain areas such as California, Arizona, Nevada and Florida. The lender "would be worried about their liability and their FHA performance," Chappelle said.