The above chart is from Harvard’s State of the Nation’s Housing report, which is published every year and has some amazing statistics.

 I have included this chart as a kind of example for my last post on FHA being an alternative to subprime loans.  What I find interesting about this chart is that it shows how FHA has been a smaller and smaller percentage of the total loans being made since 2001.  It will be quite interesting to revisit the report that comes out in 2008 and see what share of the market subprime and FHA make up at that point.

The other note-worthy thing to point out is the alarming increase in the number of home equity loans.  Home Equity loans are not a bad thing in and of themselves, but if people are cashing out most of their equity, it leaves them little room when it’s time to sell.

If you are wondering why the totals don’t add up to 100%, the rest of the loans originated each year are conventional, prime loans.

 Also, a little help with the terminology:

Alt-A: These loans are generally geared towards higher credit borrowers that need flexible underwriting guidelines (like stated income, no doc, etc.).  In its most literal sense, Alt-A stands for Alternative to A paper loans

Home Equity:  Generally, second mortgages, but loans where borrowers are cashing money out of their property

Sub-prime:  Generally, loans for individuals that have “challenged” credit

FHA/VA: Government insured or guaranteed loans

I’m sure most of you reading this are aware of the rise in foreclosures, especially in connection with subprime loans.  What has also been getting a lot of press is the fact that mortgage guidelines are tightening up, especially for traditionally subprime loans and stated income loans. 

An example: Before January if you had a 580 credit score and any number of collections, etc, you could probably get 100% financing with a subprime loan.  Today, almost all subprime lenders are requiring 640 as the minimum credit score to get 100% financing. 

Well, with a 640 credit score almost any borrower isn’t going to need a subprime mortgage, so subprime has become pretty pointless when it comes to 100% financing.  Though it still serves it purpose when needed on refinances and lower loan to value loans, it just really isn’t offering that much when it comes to 100% financing.

In comes FHA!  FHA, short for Federal Housing Administration, loans have been around since the Great Depression, when, surprise, surprise, foreclosure rates were at all time highs.  FHA are not loans BY the government, but rather insured by the government.  The borrower pays Mortgage Insurance (now tax deductible) to FHA, and if the borrower defaults the government pays out on the insurance.  Back in the depression era, it made lenders feel more secure in lending out their money.

So how does FHA factor in today?  Well, for a while, it was not so popular.  It does have some requirements other loans do not, but it has a lot going for it now that 100% subprime loans are a thing of the past. 

FHA loans do not have any minimum credit score.  In fact, they are not credit score driven, meaning your interest rate has nothing to do with your credit score, and in some cases if you have no credit score you can even get an FHA loan.  To get an FHA loan, you need to show that you are WILLING to pay your debts, especially your housing debts.  While your credit score doesn’t have to be exceedingly high, you do usually need to pay off most collections, and be able to prove that you are willing and able to pay your bills and your mortgage.