Government-Insured FHA Mortgages Rising in Popularity

Although they fell from favor (and nearly off the radar) during the last real estate run-up, FHA and VA mortgage products are now grabbing powerful market share. Government-backed loans currently account for about a third of all mortgage applications in the U.S.

While conventional mortgage activity through Fannie Mae has declined, the Mortgage Bankers Association reports that more than 32 percent of recent mortgage applications approved for buying or refinancing were government-backed loans. These primarily include FHA loans, which typically help lower income buyers by offering lower down payments and closing costs, and VA loans, which are made to people who've served in the armed forces.

Mortgage application statistics

The pace of government-backed mortgage applications tripled since last year, when FHA and VA loans made up about 8 to 10 percent of America's mortgages.  Here are some other facts worth noting:

• Data from HUD-which oversees the FHA-indicates that FHA mortgage applications for those switching out of conventional loans has grown nearly 90 percent since October.

• Mortgage application volume for government-insured loans was up 113.6 percent, while application volume for conventional loans was down almost 50 percent.

• The statistics show that borrowers are making a mass exodus away from conventional loans and into government-insured mortgages.

FHA/VA mortgage gaining market share

Agencies like the VA and the FHA don't actually make mortgage loans, but they do insure them to help protect investors against losses related to defaults and foreclosures. They lost market share during the past decade, as mortgage companies trotted out low-interest mortgages, including adjustable-rate loans with teaser rates, exotic hybrid loans, and mortgages that didn't require down payments. People have been badly burned by those "too good to be true" mortgage products, however, and are turning back to safe and secure government-backed alternatives.

A big reason for the surge in mortgage applications at the FHA is the so-called FHA "Hope for Homeowners" program. Under this emergency initiative, the government authorized approximately $300 billion in funds to help make loans to homeowners who want to refinance away from troublesome loans into more affordable ones backed by the FHA.

The same phenomenon happened during the real estate crisis of the late 1980s.  As savings and loan institutions went bankrupt, homeowners faced a wave of foreclosures, and the economy suffered through a recession and high rates of unemployment.  In those days, the ratio of FHA and VA mortgage applications compared to non-government loans reached an all-time high, capturing more than 40 percent of overall mortgage business market share. FHA and VA loans play an even more important role nowadays, and may eventually break their own records in terms of brisk activity, because Fannie Mae and Freddie Mac are in such bad shape. Without Fannie and Freddie to pitch in and help support the mortgage markets, a larger portion of the responsibility is falling on other agencies and programs like those offered by the VA and FHA.  With a credit crisis pinching the availability of loans, more consumers are seeking new alternatives.