Taxpayer-Backed FHA Guaranteed 40 Percent of Initial Home Mortgages in 2010

By Christopher Goins | November 14, 2011 | 5:27pm EST

ype="node" title="Federal Housing Administration

( - The Federal Housing Administration (FHA), a federal government agency, insured more than 40 percent of all home purchase mortgages -- existing and new home purchases -- in 2010, according to the Government Accountability Office (GAO).

In a report issued Nov. 7, the GAO said FHA’s market share of home purchase mortgages ballooned from 4.5 percent in 2006 to 40.2 percent in 2010.

In fact, the market share of FHA loans and number of borrowers obtaining FHA-backed loans has more than quintupled since 2006, the report said.

In 2006, FHA had 3.3 percent of the overall mortgage insurance market. However, its market share increased to 19.9 percent in 2010.

According to the GAO, U.S. taxpayers through the FHA guaranteed nearly 500,000 loans totaling $70 billion in home purchase mortgage insurance in 2006, the year before the recession, but that total more than tripled by 2010 -- to 1.7 million loans worth $319 billion in mortgage insurance. However, the loan total reached a high-water mark of $350 billion in 2009.

The report says that the growth in loan volume resulted from the “sharp contraction of other segments of the mortgage market and increases in the loan amounts eligible for FHA insurance.”

The Federal Housing Administration, generally known as “FHA,” provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories.

FHA does not make loans directly – it insures loans made by private lenders to homebuyers and guarantees those loans in the case of default.

According to the GAO, almost 80 percent of FHA-insured home purchase loans in 2010 went to first-time homebuyers, 30 percent of whom were minorities.

Moreover, the FHA loan limit for one-unit properties in higher cost areas is now $625,000 – down from $729,000 earlier this year.

“For the period from Jan. 1, 2011, through September 30, 2011, the limits ranged from $271,050 to $729,750 for one-unit properties in the continental United States. Starting October 1, 2011, the limits ranged from $271,050 to $625,500 for these properties,” the report noted.

According to the GAO report, borrowers only have to put down 3.5 percent for an FHA-insured loan -- much lower than the minimum down payment that many lenders require for non-FHA mortgages.

Borrowers are allowed to use gifts -- money received from family members, non-profit groups and employers -- to make their entire down payment, the report noted.

“However, borrowers are permitted to finance their mortgage insurance premiums and some closing costs, which can create an effective loan-to-value (LTV) ratio -- that is, the ratio of the amount of the mortgage loan to the value of the home -- of close to 100 percent for some FHA-insured loans,” the report noted.

In other words, some borrowers wind up placing little to no earnest money down.

Borrowers with a credit score below 580, meanwhile, must put down 10 percent for an FHA loan. And borrowers below a 500 credit score aren’t eligible for an FHA-insured mortgage loan.

FHA also insures reverse mortgages, a type of loan against the borrower's home that is available to persons 62 years or older and allows them to convert home equity into flexible cash advances while living in their homes, the GAO said.

American taxpayers currently guarantee more than 7.2 million mortgage loans of all kinds through the FHA, valued at more than $1 trillion, the report said.

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