FHA Running Low on Cash, May Tighten Its Standards

The Federal Housing Administration (FHA) which has propped up the housing market by insuring hundreds of billions in mortgage loans, is in danger of running out of money as foreclosures and bankruptcies grow. The FHA guarantess loans to first-time homebuyers as well as to those refinancing. FHA loans have lower credit standards, in many cases only require a 3.5% downpayment and have competitive interest rates compared to their conforming mortgage counterparts. FHA lending has picked up the slack created by the destruction of the sub-prime market and, together with the first time homebuyer $8,000 tax credit, has given a substantial boost to the mortgage market. FHA loans now comprise 30% of the mortgage market.

Delinquincies for FHA mortgages are downright scary. 17% of FHA borrowers are delinquint compared to 13% for all loans. The FHA's cash reserves are $3.6 billion versus outstanding loans of $365 billion, a reserve ratio of .53%. That's far below the 2% ratio mandated by Congress. To reach that level, the FHA would have to raise $70 billion. Its reserve ratio was 6.4% in 2007.

This may lead to a tightening of standards according to Housing Secretary Shaun Donovan. Th Agency is considering raising the minimum downpayment above 3.5% and raising the additional insurance payments and homeowners must make. I don't think it's a maybe, it will happen.

So, of you're thinking of getting an FHA backed loan, you better get it sooner rather than later.