A handful of lenders are trying to capitalize on recent reforms at the Federal Housing Administration and growing fears about rising adjustable-rate mortgage payments by aggressively marketing government-insured fixed-rate loans.
The vast majority of FHA loans are made to first-time homebuyers, but a few lenders are now emphasizing the benefits of using them to refinance out of ARMs.
For example, Homebridge Mortgage Bankers of Syosset, N.Y., will change its name to Refinance.com on Oct. 23 to reflect its new focus on FHA refis. Many people "are either going to lose their house or refinance to a much … higher rate" if they don't use the FHA program, said Nick Bratsafolis, Homebridge's chairman.
Other lenders, ranging from the midsize Southern Star Mortgage Corp. in East Meadow, N.Y., to U.S. Bancorp's U.S. Bank Home Mortgage unit, also report a renewed focus on FHA.
Last year the Department of Housing and Urban Development, which oversees the FHA, streamlined appraisal guidelines and permitted lenders to charge more types of closing costs to make the program more competitive with the subprime market.
Andrew Thaw, an FHA specialist with Southern Star, said the reforms have put the program "more in uniformity with the conventional market instead of having other types of criteria that were too cumbersome."
Lenders "are starting to catch on, and FHA is starting to do outreach," Mr. Thaw said. "I personally anticipate the program getting much more popular as time goes on." His company has 24 offices on the East Coast and one in California.
More sweeping reforms proposed last year by Brian Montgomery, the assistant secretary overseeing the FHA at HUD, would eliminate mandatory down payments and raise loan limits. The proposed changes, which Congress will consider early next year, could also create risk-based credit scoring that would open the FHA program to more applicants.
Michael Rollins, a correspondent account executive at U.S. Bank Home Mortgage, in Cape Coral, Fla., said lenders "are definitely going away from nonconforming products," and this change "has had an effect on the FHA business." As much as 40% of his business now comes from FHA programs, up from 20% last year, he said.
As rates on nonconforming loans continue to rise, "the market is going to drive back towards the more traditional loan products," such as FHA loans, Mr. Rollins said. Even the industry's best experts probably could not say how much higher the rates could rise, he said.
Homebridge decided to rethink its business model in 2001, when "rates skyrocketed," Mr. Bratsafolis said. "We saw the market changing."
From 2003 to 2005 about 2% of Homebridge's business came from FHA-backed loans. That jumped to 20% in 2006, and Mr. Bratsafolis said he expects FHA lending to account for 30% of the company's business by 2007.
He also expects mortgage volume at Homebridge in 2007 to be double the $1 billion it booked in 2005.
Marco Kincheloe, the owner of Alamo Services Inc., a mortgage brokerage in Chesterton, Ind., frequently applauds the FHA program in weekly and monthly newsletters he publishes for 1,800 customers. About 20% of the $20 million of loans he arranges each year are FHA-backed.
"I wish 100% were FHA, because it makes the most sense for the first-time buyer and the bottom line is, I make the most money," Mr. Kincheloe said. His outfit, which uses the brand name Alamo Mortgage Service and operates throughout the Midwest, can turn a 4.5% profit on FHA loans instead of the 2% it keeps on conventional loans.
FHA specialists say they remain confident that barriers to entering their market will help curb competition. Underwriting through the bureaucratic tangles of an FHA loan requires well-honed skills. But keeping the market cornered might become difficult for FHA lenders as HUD vigorously promotes the program.
In August, HUD announced an advertising campaign to run in 27 newspapers around the United States with the aim of promoting FHA-backed loans for first-time and minority homebuyers. HUD also said the number of FHA-approved lenders had jumped 15% since 2004, to 8,678.
Consumer advocates say FHA can be an affordable alternative to subprime loans, but cautioned that there are risks.
Despite all the red tape that lenders frequently complain about, critics say FHA lenders are less likely to scrutinize applicants' ability to make payments and that the loans are particularly vulnerable to fraud. Indeed, according to the Mortgage Bankers Association, in each of the last three years the foreclosure rate was twice as high for FHA loans as for conventional mortgages.
David Rose, the director of research and technology at the National Training and Information Center in Chicago, said there is "lots of unscrupulous behavior on behalf of brokers in the FHA program" and "very little incentive for lenders to care if you stay in your house."
William J. Brennan, a lawyer at the Atlanta Legal Aid Society, said a common fraud occurs when mortgage bankers report false incomes to the FHA to get applicants approved. The result is that "unqualified homebuyers" are put into homes "obviously destined to wind up in foreclosure," Mr. Brennan said.
Also common are schemes in which mortgage bankers work with real estate agents to buy run-down homes at a bargain, then sell them at much higher prices after making only minor cosmetic repairs, he said.
"FHA is a wonderful program," Mr. Brennan said, "but it has its problems."
