The federal government helped create the mortgage industry in 1934 by insuring long-term housing loans, but it has largely disappeared from the market in recent years as private lenders have led the mortgage boom. Now government loans may once again find a spot on the borrower’s short list.

Mortgages insured by the Federal Housing Administration are starting to make a comeback as banks and regulators tighten lending standards throughout the nation and turn away many low- and moderate-income homeowners. According to mortgage industry analysts and executives, such loans include important benefits not common in the current pool of conventional mortgages.

“With all the contraction going on in the mortgage industry from subprime issues and government regulation, it’s inviting a comeback of government lending,” said Brian Chappelle, a founder of Potomac Partners in Washington, consultants to the mortgage industry. “And it’ll be good for consumers.”

For instance, Chappelle said, FHA loans include “loss mitigation” provisions often overlooked by borrowers. If borrowers miss several payments after losing a job or some other crisis beyond their control, the lender can recover that money from the government, then allow the borrower to repay it at the end of the loan.

“The loss mitigation effort has only been around for six or seven years,” Chappelle said, “but its success rate has been phenomenal in keeping people in their houses.”

At their core, FHA mortgages do not differ from conventional mortgages. The application process is similar, and the loans are made through brokers or direct lenders with roughly the same interest rates. But these mortgages are insured by the government, so if the borrower defaults, lenders are guaranteed payment.

There are several reasons the loans have grown less common in recent years. First, the government has fairly low limits on how big a mortgage it will insure, so borrowers in the Bay Area, for instance, can receive a loan of about $417,000, which is far less than the area’s median home price of about $639,000.

In addition, the FHA insures only a small range of fixed-rate and adjustable-rate products, and it obliges brokers to meet specific requirements, such as maintaining a net worth of at least $63,000, with at least $12,600 in the bank. During the recent mortgage boom, private lenders — particularly those lending to borrowers with poor credit — created a sprawling inventory of loans that appealed to many borrowers, and lenders were liberal in inviting mortgage brokers to offer them to customers.

A study by the Federal Reserve Bank of St. Louis last year found that even though FHA loans offered rates slightly lower than comparable subprime mortgages without government backing, many borrowers did not use them, partly because they did not know about them.

But that is starting to change. Kim Neilson, the senior vice president of the McCue Mortgage Co. in New Britain, Conn., said, “We’re starting to see a little bit of pickup on FHA loans.”

Neilson said the renewed interest from consumers began about two months ago, when subprime lenders began tightening their standards. “The FHA is a little more flexible when looking at someone’s credit,” she said. “With FHA, someone with a 640 credit score is more likely to be approved.”

Source:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/04/29/REGIKPH05K1.DTL