Mike Stuckey Senior news editor • Profile

The collapse of the subprime mortgage industry and its fallout on conventional lenders has led to such a boom in business at the Federal Housing Administration that the agency is now insuring nearly one in five new residential mortgages, helping prop up sales in some of the nation’s battered real estate markets.

The FHA’s surge in business, which includes many loans to high-risk borrowers who put just 3 percent down in markets where real estate prices are in decline, raises questions about a potential hit to taxpayers in the future.

The agency, however, says there’s no cause for concern.

“FHA is doing very well and we expect that to continue,” Meg Burns, FHA’s director of single-family program development, told msnbc.com.

But some observers say the booming market for FHA-insured loans could lead to problems down the road.

“Values are dropping and nobody’s got a safety net and that’s what worries me about FHA,” said Scott Evans of Atlanta, whose Family Mortgage is one of the top five mortgage brokers in Georgia. “We’re taking on a lot of risk as taxpayers that used to be in the private sector.”

While the agency’s standards are open to debate, there is no doubt that demand for its services is soaring.

Among the highlights in statistics provided by Burns and FHA spokesman Lemar Wooley:

• FHA’s single-family market share has skyrocketed to 17 percent, a nearly six-fold increase in the last two years.
• The volume of FHA-insured single-family mortgages, for both purchases and refinances, has risen from an average of $4.9 billion a month in fiscal 2007 to over $24 billion in the last quarter — a pace that threatens to surpass the agency’s congressional authorization of $180 billion in new business for the year.
• FHA currently insures 4.4 million single-family mortgages — or about one in every 10 U.S. home mortgages, with a total unpaid balance of $474 billion.

Created to help 'first-time and minority homebuyers'
Created by Congress in 1934, the FHA’s mission is to provide mortgage insurance to private lenders to encourage the flow of mortgage money to “households not served or underserved by the private sector, most notably first-time and minority homebuyers,” according to FHA’s annual report.

FHA borrowers typically have less money – often, none – for down payments and poorer credit than conventional borrowers. While most FHA loans require down payments of at least 3 percent, the entire amount can be a gift from a friend, a relative or other sources as long as it isn’t from the seller. The FHA does not set minimum credit scores for borrowers and allows them to have blemishes in their credit files that would prevent them from obtaining conventional loans. The agency’s rules also let borrowers qualify with the help of co-signers – friends, parents or other relatives – who will not be living in the mortgaged home.

But the FHA is not a subsidy program. Borrowers pay for the insurance through up-front premiums — currently 1.75 percent of the loan, or $1,750 per $100,000 — and insurance fees on their loans — generally 0.5 percent a year on the unpaid balance, or $500 on a $100,000 balance. The premiums fund a reserve pool, now at $28 billion, as well as the agency’s operating costs.

“We don’t rely on taxpayer dollars,” Burns said.

In the go-go days of the subprime industry, with many lenders making far riskier loans than they are now, the FHA process was seen by many real estate professionals as overly expensive for borrowers and fraught with red tape. Consequently the agency’s market share fell from 11 percent in the mid-1990s to just 3 percent in 2006.

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