Goodbye subprime, hello FHA

At mortgage conference, lenders push back-to-basics theme for industry in coming years.

By Jeanne Sahadi, CNNMoney.com senior writer

October 15 2007: 5:49 PM EDT

BOSTON (CNNMoney.com) -- If your credit is weak or your savings anemic, here are two phrases you're likely to hear from mortgage loan officers in the next few years: FHA and mortgage insurance.

They're part of a back-to-basics theme that was emphasized Monday at the annual conference of the Mortgage Bankers Association in Boston.

For those who entered the business in the past five years, they've only known the good times and will need to be re-educated, said Paul Bibb, CEO of National City Mortgage, who was on a panel of leading mortgage industry executives.

"You probably have a lot of loan officers who can't spell FHA," said Bibb.

Bibb and David Lowman, CEO of Chase's Global Mortgage, which is a top 10 originator and servicer, said that during the go-go days of the housing boom, loan officers would steer home buyers with weak credit to subprime loans. And they would advise them to finance part of their down payment with a home equity loan.

"We probably all wish we had trained our sales staff to sell mortgage insurance," Lowman said. "The reason we're in this crisis is that we got away from the basics."

Now with the subprime market eviscerated, loan officers will be steering more borrowers with weak credit to loans insured by the Federal Housing Administration and advising those with little savings to get private mortgage insurance in cases where they can't put down 20 percent.

The FHA program is intended for home buyers and homeowners with weak credit. Borrowers with FHA-insured loans - which they get from private lenders as they would any other mortgage - pay a small premium to the FHA every month.

The FHA, in turn, uses those premiums to cover the lender in the event of foreclosure and requires lenders to pursue viable ways to help borrowers avoid foreclosure if they become delinquent.

Bibb can remember a time when FHA loans made up 30 percent of National City Mortgage's business. A few years ago, however, FHA loans had shrunk to about 3 percent of the business. Now, he said, they currently account for as much as 12 percent.

The call to go back to basics comes amid a sobering forecast for home price growth. Patricia Cook, executive vice president and chief business officer of Freddie Mac, who was also speaking on the MBA panel, expects price declines on a nationwide basis this year and next and then only a slow recovery thereafter.

Some markets are holding up and will continue to do so, Bibb said. But he's less optimistic for markets such as Arizona and Nevada where home-price gains were driven by heavy speculation. "[In those markets] the correction could be quite severe and last into 2009, if not 2010," Bibb said.

Lawmakers have been working on legislation to reform the FHA to modernize its standards so that they reflect changes to the housing market in the past 30 years. Among the changes on tap, lawmakers want to:

Raise loan limits. Today the FHA won't insure loans above $362,790 for single-family homes, and even less in lower-cost areas. Lawmakers are considering raising that ceiling to at least 100 percent of the conforming loan limit for mortgages backed by Fannie Mae and Freddie Mac, currently $417,000.

Reduce down payment requirements. Homeowners would no longer be required to have 3 percent equity or the cash equivalent. They could get an FHA-insured loan with 0 percent down.

Reduce complexity. Lenders have been complaining about the time and expense it takes to make an FHA loan.

Separately, the Department of Housing and Urban Development, which oversees FHA, may move to introduce risk-based pricing. Riskier borrowers would have to pay higher premiums than less risky borrowers.