Builder - December 2008 - (Page 76) than $102 billion. Such growth worries industry watchers who aren’t persuaded that builders, lenders, and others have truly sworn off the practices that created the now-defl ated housing bubble. IRRELEVANCE TO DOMINANCE As recently as 2004, though, FHA’s sinking market-share numbers had even government employees questioning whether their agency, established in 1934, had become unnecessary. (See “FHA Market Share,” page 77.) “Our market share was dropping precipitously,” remembers Meg Burns, director of FHA’s office of single-family finance. “We thought, ‘If people can get prime-rate financing without government insurance, that’s a great thing.’ ” So they decided to research the issue. What FHA uncovered—that borrowers who could have qualified for FHA loans at prime-level interest rates were instead choosing more-expensive subprime products—was largely ignored in 2005, when agency staffers testified at a hearing about their subprime findings and concerns. Meanwhile, FHA market share continued to fall, sliding to a low of 5 percent in 2006 for new-home purchases. What a difference two years can make. For 2008, FHA projects a new-home market share of almost 13 percent, and the percentages are much higher for some home building firms. At CTX Mortgage, which serves Centex Homes buyers, 60 percent of its loans are FHA-insured. Klinger expects even higher figures at Hovnanian, where he says 60 percent to 68 percent of his loans will be FHA. “During the boom, we did 90 percent conventional and 10 percent government loans,” says Kim Shelpman, president of Holiday Builders in Melbourne, Fla. “Now it has completely flipped.” The current prevalence of FHA and other government-backed loan programs has influenced many builders’ construction and sales decisions. American Dream Development, a small private builder based in Junction City, Kan., has reduced the size of its homes by almost 200 square feet, to 1,750 square feet. “We’re shrinking square footage in order to get into the price range where more people can qualify,” says company president Jeff Burton. Other builders are also paying attention to FHA loan limits. In Raleigh, N.C., Mungo Cos. is using the FHA loan limits as a pricing benchmark, with FHA plus 5 percent to 10 percent as the target, according to company president Steven Mungo. BUILDERS GET A REFRESHER RECENT FHA CHANGES ■ Loan limits are calculated on local market data from where the home is located. That means FHA will back loans that are as high as 115 percent of the area median home price, with the lowest possible limit set at $271,050 and the maximum at $625,500. ■ Minimum down payment required for an FHA loan: 3.5 percent as of Jan. 1, 2009. ■ No seller-funded down-payment assistance as of Oct. 1, 2008. Source: NAHB As Renner learned last spring, the FHA revival has meant a refresher course for builders on this government-backed financing. Borrowers must have a down payment of 3 percent, which rises to 3.5 percent on Jan. 1 under legislation passed last summer. And, thanks to that same legislation, builders may no longer provide that down-payment money to buyers via a nonprofit group. Most importantly, borrowers must actually demonstrate to lenders that they have the ability to repay their home loan. “With subprime, they didn’t verify income or whether people paid their bills on time or whether they had reserves in the bank or the source of the cash for the down payment,” Klinger says. “For FHA, you must document [borrowers’] income, their reserves, and make sure the payment is at an acceptable level. It’s lending the way lending was supposed to be.” That doesn’t mean every buyer has a perfect credit report; FHA is designed to provide affordable mortgages to riskier, less affluent borrowers who may have credit blemishes that require extra research or documentation. “You can manually underwrite a government loan, so if there are any quirks, you have a person looking at it versus a computer,” Shelpman says. But the approval—or rejection—process doesn’t take as long as builders might expect. “If you are a direct-endorsed lender by HUD, it doesn’t add to the work, because you are set up operationally to make decisions,” Klinger says. “We can get buyers answers quickly and do all the paperwork behind the scenes.” Smaller builders who don’t maintain their own direct-endorsed lending operation should build extra time into the schedule. “There is more paperwork to fi ll out,” says Burton. “It adds perhaps five to 10 days to the closing date. It just depends on how familiar lenders are with the program.” Builders who haven’t used FHA in years probably will find other aspects of the program simpler than they remember. “It got to the point that the laws had to change for the program to move forward,” explains 76 ■ B U I LD E R de c e m ber 2008 W W W.BUILDERONLINE.COM http://WWW.BUILDERONLINE.COM
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