Credit: David Plunkert
Among the requirements: 51 percent of the project must be presold. That’s undeniably difficult in the current housing market; but attempting to sell homes not eligible for FHA financing is nearly impossible, and builders know it. “[CEO] Ara [Hovnanian] has emphasized to the company presidents that you better make sure you make this a priority,” Klinger says. “If you don’t meet the presale requirements and get FHA community approval for your project, stick a fork in it—it’s done.”
FHA’s Burns knows the multifamily for-sale side of the FHA approval needs attention. “We are still negotiating about how streamlined we can make the program, and unfortunately builders are being caught up in that transition,” she says.
The situation illustrates the ongoing challenge for a government program such as FHA, where requirements can quickly get out of sync with market realities. “FHA and VA need to operate as close to a conventional [financing] basis as they can, because when a builder builds a house on a spec basis, he doesn’t know how the buyer is going to finance it,” Renner says.
But when conventional financing practices have resulted in jaw-dropping numbers of foreclosures across communities poor and affluent alike, how close to conventional should FHA get?
Calculated Risks
Even during the boom, housing analyst Ivy Zelman tended to huddle with the bears rather than run with the bulls, and she has not changed her habits during the downturn. To her, the rapidly growing FHA is not a lifesaver for builders and buyers during the current credit crunch, but the likely source of the next subprime-like shock.
“Just look at [FHA’s] default rate and loose lending criteria—no credit score, only 3.5 percent down payment, and front and back-end ratios at 38 percent and over 50 percent,” Zelman says, referring to the percentage of a borrower’s pre-tax monthly income dedicated to their home loan and total debt payments, respectively. “Maybe it’s not as bad as subprime, but a lot of [buyers with] weak credit and with no money down are purchasing homes in a deflationary environment. It’s not a good recipe for success.”
Burns disagrees strongly with the characterization of her agency as a subprime bubble just waiting to pop. “That comes up over and over,” she says fiercely. “We actually make borrowers qualify. They have to show they have income to repay the loan. We validate their employment; it isn’t just fictional income. As for us being the ‘new subprime,’ we’re not subprime. We give people access to prime financing at cost.”
But the recent explosion of FHA business has caused alarm in some quarters. Direct-endorsed FHA lenders have the ability to review and manually approve government loans, an authority which some may be abusing. A recent Business Week story highlighted aggressive FHA lenders and questioned the government’s ability to adequately review the large number of people applying for FHA lending credentials.
Shelpman finds such news “disturbing.” “Unfortunately, there are always vultures looking to make a quick buck, and these types of lenders should have their licenses revoked immediately or should never have been approved for FHA lending in the first place,” she says. “If this program is abused by these unscrupulous individuals, it will invariably provide negative impact on builders both in the short- and long-term by changing or restricting the standards to which the program has operated effectively for several generations.”
HUD spokesman Lemar C. Wooley says the agency is addressing the problem. “HUD’s Office of Single Family Housing added over 100 new staff this past fiscal year, to help FHA handle the increased number of lender applications and increased volume of business,” he says. That increase also translates into more files to review during the agency’s annual audits of FHA lenders; the new employees will also be involved in that work.
Finally, Burns rejects the idea that the recent growth of FHA translates into riskier lending decisions, asserting that FHA is simply playing its traditional counter-cyclical role and stepping in to provide credit when the private sector cannot. “Our borrower base right now is better than our traditional FHA borrower because of the contraction,” she asserts. “People who couldn’t qualify for FHA before still can’t qualify for FHA.”
Recent FHA Changes
Loan limits are calculated on local market data from where the home is located. That means FHA will back loans that are as high as 115 percent of the area median home price, with the lowest possible limit set at $271,050 and the maximum at $625,500.
Minimum down payment required for an FHA loan: 3.5 percent as of Jan. 1, 2009.
No seller-funded down-payment assistance as of Oct. 1, 2008. Source: NAHB
Alison Rice is senior editor, online, at Builder magazine.