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FHA Financing Losing its Chicago Splendor to Refinancings

by Chicago Agent

FHA financing has become an important part of the housing market.

According to new data from the Mortgage Bankers Association, Federal Housing Administration loans in the Chicagoland area fell dramatically last year as more homeowners opted to refinance their homes.

As reported by  Mary E. Morrison of Chicago Real Estate Daily, 32,413 FHA-insurd loans were made in 2010, a 36 percent decline from the 50,504 in 2009. In addition, the dollar amount of FHA loans fell by 38 percent to $6.4 billion, and FHA financing accounted for 14.6 percent of 2010 new home loans in Chicago, almost a 6 percent decline from 2009.

The declines come amidst a resurgent period for FHA loans that has seen them become one of the go-to options for home financing, and even with the declines, FHA remains far above its historical levels in the Chicago home financing market. In 2006, for instance, at the height of the housing boom, FHA loans accounted for just 2 percent of the market.

The reason, as Chicago Agent covered in its lending issue in October, is the restrictive nature of current financing. As NPR covered just this morning, the largest private banks are still extraordinarily hesitant to provide home loans, and in their place, FHA loans have become a convenient replacement, far exceeding the low income/low quality stigma that often marred such financing.

Geoff Smith, the executive director of the Institute for Housing Studies at DePaul University, said the housing market would be much worse off today without FHA’s financing.

“FHA has been critical in filling the gap and continuing to give homebuyers the ability to access mortgages, especially with low down payments,” Smith said.

And the decrease in FHA market share has not even been the result of greater private bank lending; rather, it’s the result of a greater emphasis on refinancing, said Guy Cecala, the CEO and publisher of Inside Mortgage Finance Publications.

“FHA doesn’t benefit as much from the refinance market,” he said. “Those loans are primarily for home purchases.”

Also worth considering, Cecala said, is that FHA was forced to raise its minimum down payment from 2 percent to 3.5 percent, to counter the substantial losses the agency has shouldered from bad subprime loans made during the boom years.

But as Katie Buitrago, a policy and communications associate at Chicago-based Woodstock Institute, put it in Morrison’s piece, FHA financing will remain popular as long as financing remains in its precarious position.

“Very few people have a 20% down payment available and 750 credit scores,” she said.

Morrison cites the example of newlyweds Dustin and Melissa Landgraf, who bought a single-family home in Bloomingdale last month with an FHA loan. They put down 3.5 percent on a 30-year FRM with just a 3.75 percent interest rate. Landgraf said that she and her husband would have never been able to afford the house with a 20 percent down payment, given their monthly student loan payments.

“If we had to go the conventional route, we wouldn’t own a house right now,” she said.

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