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Home Builders, FHA, And The Future

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Susan Walsh

I want to revisit a post I did in this blog on Monday, citing a survey from John Burns Real Estate Consulting.

The survey consists of 262 home building industry executives, both public and private, covering 86 MSA's and 1,741 communities, according to JBREC.

The headline in the survey, to me at least, came in a paragraph right before the chart titled, "What percentage of your home buyers this year used this type of financing?"

In addition to the tax credit that expires Nov. 30, government mortgage programs have been critical in 2009. The survey reveals that 59 percent of this year's sales have been dependent on FHA, VA or USDA financing programs with 96.5 percent to 100 percent LTV.

I took that to mean that the survey of builders found that 59 percent of their buyers used these loan programs and put somewhere in the realm of 0 - 3.5 percent down. FHA's minimum is 3.5 percent.

Then I received the following email from a HUD spokesperson:

Almost 40 percent of FHA-insured loans endorsed in calendar year 2009 have AT LEAST a 5 percent down payment. 20 percent of loans had at least 10 percent down payment and an additional 18 percent had between 5-10 percent down payment. In fact, less than a quarter have only 3.5 percent down payment.

This means that the study you cite draws a very flawed conclusion by assuming that ALL FHA-insured borrowers only put down the minimum 3.5% down payment. This may also be the case for VA and USDA loans as well – you should check with them. However, as it relates to FHA loans, the study’s finding that "59 percent of this year's sales have been dependent on FHA, VA or USDA financing programs with 96.5 percent to 100 percent LTV" is inaccurate.

Granted, these are stats for all loans, not just loans on new construction, so I want back to the survey from JBREC. John Burns said he doesn't doubt HUD's statistics and admits, "We should have said that “59 percent of new home sales are relying on loans from these agencies that allow loans from 96.5% to 100% LTV.” But he also adds, "I think the new home sales are much more skewed to the 3.5 percent group." And the FHA does admit that 60 percent are putting down 5 percent or less.

Okay, so what am I trying to get at here?

Clarity.

Yes, the study could have been written more clearly, and it was misleading in the text, if not the chart. Yes, FHA-insured loans have become a huge part of the new construction market. We can quibble about the actual percentage down, but clearly it is less than the 20 percent now required by most banks on a conforming loan and the 30 percent necessary for a jumbo. That's the mandate of the FHA — to bring home ownership to lower-income buyers.

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I still think FHA, even with its higher lending standards and old-fashioned loan products, is walking a dangerous line in this housing recovery. Are they the new subprime? No, but they are driving big business on the low end of the market. A lot of it. This is helping clear bloated inventory, but let's face it, it's also the most precarious segment of the housing market to be in today, given the unemployment rate and the overall economy. Recovery in housing begins on the low end, where the bulk of the foreclosures are and where so much of the overblown construction was during the housing boom. But we also need to fuel the middle, and I'm not quite sure how that happens. Some higher-end buyers are getting in on FHA loans, but the conforming cap keeps many move-up buyers in still higher end markets out. FHA cannot be all things to all borrowers.

That's all I'm saying.

Questions? Comments? RealtyCheck@cnbc.com