FHA Audits: Does Government Involvement Help?

FHA's reserves are high, their defaults are low, and the average borrower's credit score is 720. So why did FHA recently change premiums? Because of an upcoming audit. They are worried about how the audit is going to turn out.

If the audit turns out good:

1. They can show that government involvement in loans has been a good thing.
2. They can show that the private sector's loans of no docs and stated income is what caused the market to go down.

FHA is striving to show that low down full docs are safe. They want to show the private market how to reduce risk and still give more loans.

Their current worry is lenders making their own rules! Lenders have been setting their own guidelines because they are afraid they may be required to buy back bad loans. As a result lenders aren't loaning to individuals with scores lower than 700. To help today's market we need lenders to feel comfortable giving loans to individuals with lower credit scores. A big part of getting the market back is having these individuals buy homes. This includes those individuals that are 1099.

In 1999 FHA (which only had 20 percent of market share) gave more loans to individuals under 700 fico, than all gse's and FHA combined this past year.

If the audit comes out good we are on our way. If it comes out bad we may still have a fight ahead.