FHA on track for busiest year as it backs 23% of mortgages

— -- Almost a year after the federal government launched its rescue of the housing market, nearly one in four new mortgages is insured by the Federal Housing Administration.

With less than a month to go in the 2009 fiscal year, the FHA is on pace for its busiest year.

From Oct. 1 through mid-August, applications for FHA single-family-home mortgages were up 50%, to 2.52 million, from the same period a year earlier.

Approvals for purchases, refinancings and reverse mortgages rose 70% to 1.67 million.

Eighty percent of the FHA mortgages for purchasing homes went to first-time buyers drawn to the FHA's low-down payment requirements, starting at 3.5%. Private lenders making conventional loans typically require at least 10% down.

The FHA's market share, about 3% in 2006, has swollen to more than 23%. With credit still tight, many borrowers could not get a mortgage without FHA help.

FHA loans "are one of the most important sources in this market," says Mark Zandi of Moody's Economy.com. "Without FHA, the housing slide would be much more severe. We wouldn't be talking about a recovery now. We'd still be talking about a crash."

FHA loans also have become more popular because of the demise of many subprime lenders, which sometimes allowed buyers to purchase a property with nothing down and no documentation of income.

In addition, FHA increased its loan limits at the beginning of the year. Previously, the maximum had been $362,790. The new ceiling raised that to $729,750 in high-cost areas such as Boston, New York and Washington, D.C.

Also fueling demand for FHA-insured loans is this year's tax credit of up to $8,000 for first-time home buyers.

But as FHA insures more loans, it is also assuming more risk.

Foreclosures on homes with FHA mortgages rose to 1.76% in June from 1.6% a year ago, and the default rate — for mortgages 90 days or more delinquent — was 6.88%, up from 5.57%.

"I'm very concerned about risk," says FHA Commissioner David Stevens, who adds that risk is mitigated in part because applicants today are more solid than those in recent years.