FHA Home-Financing Volume Sign of ‘Very Sick System’ (Update2)
May 24, 2010, 12:13 PM EDT
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(Adds comment from Bank of America director in 15th paragraph.)
By Jody Shenn and John Gittelsohn
May 24 (Bloomberg) -- Loans guaranteed by the Federal Housing Administration, the U.S.-owned mortgage insurer, may be involved in more home-purchase transactions than borrowing financed by Fannie Mae and Freddie Mac.
FHA lending last quarter may have topped the combined volume of government-supported Fannie Mae and Freddie Mac in a home-lending market that’s still a “government-financed market,” David Stevens, the agency’s head, said today at a conference in New York, citing research by consultant Potomac Partners.
“This is a market purely on life support, sustained by the federal government,” he said at the Mortgage Bankers Association conference. “Having FHA do this much volume is a sign of a very sick system.”
The FHA, which backs loans with down payments as low as 3.5 percent, insured $52.5 billion of home-purchase mortgages in the first quarter, compared with $46 billion of purchases of the debt by Fannie Mae and Freddie Mac, according to data compiled by Washington-based Potomac Partners.
The FHA and Fannie Mae and Freddie Mac, which regulators seized in 2008, have been financing more than 90 percent of U.S. home lending after a retreat by banks and the collapse of the market for mortgage bonds without government-backed guarantees.
Credit Scores
Fannie Mae and Freddie Mac executives said at the conference that their tightening of mortgage-underwriting guidelines since the housing slump worsened in 2008 hasn’t been as severe as some observers believe. FHA has been taking steps to shore up its program after being left with “terrible portfolios” from 2007 and 2008, Stevens said.
Freddie Mac has mainly “eliminated” its financing of certain “esoteric products,” Donald J. Bisenius, executive vice president of the McLean, Virginia-based company’s single- family credit-guarantee business, referring to debt such as low- documentation lending or so-called option adjustable-rate mortgages with growing balances.
The company’s “parameters around” 30-year fixed-rate loans still allow for relatively low down payments and credit scores and high debt-to-income ratios, he said.
“It’s not obvious to me that the credit box has shrunk as much as the numbers might suggest,” Bisenius said.
Lower home prices and interest rates have boosted home affordability, making it easier for home buyers to qualify with simpler loans, said Karen R. Pallotta, executive vice president of Washington-based Fannie Mae’s single-family mortgage business.
‘Better Environment’
“It’s a much better environment than any time in the recent past for borrowers who want to buy homes,” she said. As a result, more than half of Fannie Mae loans for home purchases have been to “low-to-moderate income families,” Pallotta said.
Issuance of so-called non-agency home-loan securities will eventually revive because “the government can’t continue to be 95-plus percent of the market,” John Herbert, a director at Credit Suisse Group, said at the conference. One policy change that’s likely in the future is an unwinding of the boost in recent years to the loan limits for Fannie Mae, Freddie Mac and FHA, to as much as $729,750 in high- cost areas currently, he said. That should then spur more private mortgage-bond deals, Herbert said.
A securitization of $237 million of jumbo mortgages by Redwood Trust Inc. and Citigroup Inc. last month was the first non-agency deal backed by new home loans in more than two years, after that market peaked at $1.2 trillion in both 2005 and 2006.
Limited Volume
While the underlying loans were probably stronger than what will be found in typical future deals, such “transactions are becoming profitable from the perspective of an originator” as debt investors look to deploy cash that’s been “on the sidelines waiting,” said Ketan Parekh, a director at Bank of America Corp. The Redwood deal was important because it got big lenders “more comfortable” with making loans outside of Fannie Mae, Freddie Mac and FHA guidelines, said Adam Yarnold, a managing director at Barclays Capital, the securities arm of Barclays Plc. Still, private-securitization volumes may remain limited because banks with access to cheap short-term funding also are seeking to buy and hold home loans, he said. “Product for securitizations is difficult to source because the portfolio bid is so much stronger,” he said.
--Editors: Chapin Wright, Mitchell Martin
To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net; John Gittelsohn in New York at johngitt@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net