FHA Raises Subprime Debt Insured For Housing Rebound: Mortgages

In Honolulu, on the southern coast of the island of Oahu, there’s a four-bedroom home priced at $785,000 that has views of the sun setting over the Pacific Ocean. The beaches of Waikiki are 15-minutes away.

Starting this month, the property is available to buyers with a subprime credit score, limited cash reserves and a 3.5 percent down payment using a loan backed by the Federal Housing Administration. Without the agency, a buyer would need a 20 percent down payment and an unblemished financial history for a jumbo mortgage.

The FHA is betting housing can recover enough to expand financing and earn bigger fees to revive its record-low capital levels. The agency increased the size of mortgages it’s willing to insure to as high as $793,750 in Hawaii and $729,750 in the costly real estate markets of states including California, Florida, and Virginia. In his State of the Union address on Jan. 24, President Barack Obama proposed a new refinancing program that may expand FHA’s responsibilities, and risks, even further.

It’s “not the best time to begin guaranteeing houses that the average American couldn’t afford,” said Anthony Yezer, director of the Center for Economic Research at George Washington University. “It may be that the insurance fund even now is insolvent.”

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