More Buyers Choose Conventional over FHA Loans

The use of mortgage financing in the housing market jumped sharply in the month of August, but the use of FHA financing declined, suggesting the government program is losing favor and private lenders are gaining market share.

“Conventional mortgages are making a comeback while FHA mortgages are not,” commented Thomas Popik, research director for Campbell Surveys today . “Reasons for the growth in conventional mortgages include low rates, increased underwriting of high LTV mortgages by private mortgage insurers, and a price structure including insurance premiums that is cheaper than the FHA alternative.”

Mortgages were used to finance 68.9 percent of home purchase transactions in August, up from 67.5 percent in July. Significantly, not all mortgage financing products saw the same gains in market share. FHA-financed transactions rose only slightly from 25.5 percent in July to 25.9 percent in August. Back in January, FHA transactions accounted for 27.3 percent of all home purchase transactions.

Ellie Mae reported last week that the FHA share of mortgage originations has declined from 25 percent in May to 21 percent in August. During the same period, conventional mortgages increased their sales from 65 to 70 percent of all new mortgages. Purchase mortgages increased from 44 to 47 percent.

Real estate agents responding to the latest HousingPulse survey indicated mortgage availability has improved over the summer months, especially for homebuyers with less than 20% cash down payments. “Mortgages for home buyers with less than 20% down were available more than in previous months,” commented an agent from California. “Contrary to media reports, there is no shortage of mortgage money available for buyers with down payments less than 20 percent,” reported an agent in Texas.

Real estate agents also commented on historically low interest rates. “Amazing rates - less expensive to pay mortgage per month than to rent. Unbelievable opportunity and buyers know it,” exclaimed an agent in California. “The money is almost free, with 3.785 percent being about average for a 30 year fixed-rate mortgage with 3.5 percent down,” contributed an agent in Washington State.

Despite reports of improving access to financing from real estate markets, the National Association of Realtors is continuing its battle against for greater access to credit. Last week NAR’s president Mo Veissi urged Fed Chairman Ben Bernanke to weigh in on three key rule proposals — the Qualified Mortgage (QM), the Qualified Residential Mortgage (QRM), and the Basel III capital standards — that Veissi said are both putting a chill on lending and have the potential tighten credit further. All three individually and certainly together have the potential to tighten credit.

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