Making homebuyers out of renters

Cuts in FHA insurance costs help first-timers and second-chancers Lower premiums “turned around the homeownership rate”

Erin Maude of Kirkland, Wash., returned to homeownership in December, three years after losing her condo. This time around, she’s confident she’ll keep her house, which she bought with the help of a 14 percent raise and a Federal Housing Administrationbacked mortgage, which required little money down.

“I’m very lucky,” says Maude, an airline marketing manager. “Without FHA, I don’t know how long it would have been before I could have saved for a bigger down payment.”

U.S. homeownership rates have been slow to bounce back from the foreclosure crisis. Now renters—those buying their first home and people like Maude who are looking for a second chance— are wading into the property market. For the second half of 2015, the share of households that own their home rose after almost two years of declines.

Some may be responding to high apartment rents, up 4.6 percent in the fourth quarter from a year earlier, according to the real estate data tracker Reis. The trouble is, there are also fewer affordable houses to buy. The inventory of starter homes (those in the bottom third by price) is down 39 percent from three years ago, according to the brokerage Redfin.

The FHA insures loans, protecting the lender from a loss if the borrower defaults and allowing for less stringent criteria. In 2015 the government reduced premiums borrowers pay for that insurance. FHA-backed mortgages, used mostly by first-time buyers, accounted for 22 percent of all new loans in December, up from 17 percent a year earlier, according to data from Ellie Mae, whose software processes mortgages. Sam Khater, deputy chief economist for CoreLogic, calculates that because of increased FHA loans, more than 250,000 firsttime homebuyers were added to the market in 2015.

“The FHA insurance-premium cut pulled forward the day that first-time homebuyers came back in a big way and turned around the homeownership rate,” says Mark Zandi, chief economist for Moody’s Analytics.

For a $2,400 monthly payment,

“Since the federal government is guaranteeing these loans, there isn’t much market discipline to prevent risky loans from being made.” �Stephen Oliner, resident scholar at the American Enterprise Institute

Maude gets twice as much space and is closer to Lake Washington than she was in the town house she rented for only $400 less. She has a fenced-in backyard where her dog, Percy, can run. She put 4 percent down, more than the 3.5 percent required by the FHA.

After losing a previous job and taking a pay cut, Maude lost her Atlanta condo three years ago in a short sale, a transaction in which lenders agree to accept less than what’s owed on the property. By November of last year, she was eligible again for an FHA loan.

She bought the Kirkland house in December, making a full-price offer of $422,000 the day after it went on the market. She knew that the supply was too tight for her to delay. “There are now only two to four houses within 5 miles even on the market in the price range I was looking at,” she says.

Others haven’t been as lucky. Tough credit standards prevented 5.2 million mortgages from being made from 2009 to 2014, according to the Housing Finance Policy Center at the Urban Institute. That left fewer families able to buy at an opportune time when homes were cheaper, the institute said in a report last month.

Critics says the increase in FHA loans brings risk that will become apparent the next time the economy tumbles. “Since the federal government is guaranteeing these loans, there isn’t much market discipline to prevent risky loans from being made,” says Stephen Oliner, a resident scholar at the American Enterprise Institute.

CoreLogic’s Khater says loans of all types made in the past six years are “pristine” and have the lowest default rates in almost two decades. According to Rob Nunziata, chief executive officer of FBC Mortgage in Orlando, the new activity is a sign that lenders are feeling more confident as the market recovers. In the past year, his company has dropped its minimum credit score for an FHA mortgage to 580 from 640. “Credit standards were a little too tight,” he says. “Now they’re easing toward a more acceptable level.”

The bottom line Restrictive credit hindered firsttime buyers. New FHA rules are helping them, even as the inventory of starter homes is low.