After five years of almost no competition, the Federal Housing Administration’s share of the low-down payment mortgage market is finally being challenged.
Since the mortgage meltdown, most private lenders stopped making loans to people with a less than 20 percent down payment. They couldn’t afford to take on any more risk after facing serious losses from toxic loans. The FHA filled in the gap, guaranteeing essentially all low-down payment mortgages, even those with as little as 3.5 percent. In 2012, the FHA backed $233 billion loans, an increase of 22 percent from the year before.
Yet, that large volume of loans has forced the agency to increase its fees. As of April 1, 2013, the FHA instituted an annual increase on its mortgage insurance premiums of 0.10 percent. And perhaps more significantly, the FHA changed its policy on private mortgage insurance. Instead of being able to cancel their policies after their loan-to-value ratios reach 78 percent, borrowers must now hold on to that policy for the life of the loan. That means homeowners will be paying tens of thousands more over the course of their mortgages.
Several banks and lenders have seen this as an opportunity to jump back in the market of low-down payment loans by offering consumers a better deal. Bank of America, Wells Fargo and TD Bank are among those offering mortgages with down payment requirements as low as 5 percent.
“As the FHA selectively reduced market share by increasing premiums, we introduced a substitute for FHA loans,” said Malcom Hollensteiner, the director of retail lending sales for TD Bank in a CNN article.
And these lenders will not require borrowers to keep private mortgage insurance indefinitely – only until they reach 20 percent equity in their homes. With better terms like these, we may have seen the end of the FHA’s market dominance.