Groucho Marx once remarked that whenever things start to look really dark, remain calm, don't panic, and above all, turn on a light.

Given the barrage of financial stresses battering the credit and equity markets these days, consumers, economists and investors alike could use some of Groucho's levity, and some light. In this case the light may appear in the form of the Federal Housing Administration.

What's old is suddenly new

The Federal Housing Administration, the once-viewed-as-antiquated, irrelevant Great Depression-era government agency, is suddenly emerging as the centerpiece of government efforts to bolster the U.S. housing market, reported The Wall Street Journal (subscription required.)

The FHA has become the cheapest, and in many cases, the only alternative for borrowers who can make only a small down payment, and the agency is rapidly gaining market share.


The FHA does not make loans. It provides insurance - - insurance that covers the risk lenders/investors who own the loan assume. Further, the FHA's insurance is helping to fill the gap created as both Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) add fees and increase down payments as compensation for the higher risks mortgage funders say exists in investing in mortgages in today's financial environment.

FHA: higher mortgage limits

Historically, the FHA has been a means to help lower-income borrowers, but that is changing, as banks flee many categories of mortgages, Reuters reported. Further, the 2008 economic stimulus bill passed by Congress is also increasing the FHA's ability to assist the housing market's recovery.

The economic-stimulus bill passed by Congress and signed by President Bush last month raises the ceiling on the size of loans the FHA can insure to $729,750 in the highest-cost areas, up from a previous cap of $362,790, The Milwaukee Journal reported Friday. The new limits are due to expire at the end of this year, but Congress is likely to renew them, economist Glen Langan, who specializes in Congressional policy, told BloggingStocks Friday.

Further, as a result of the FHA insurance, home buyer interest rates are lower than prevailing market rates. The Journal, citing FHA data, said the interest rate for an FHA-insured $325,000 30-year fixed rate mortgage would be 6% for a borrower with strong credit. The comparable Fannie Mae and Freddie Mac programs would carry a 6.375% interest rate.

Just as important, the FHA program requires a lower down payment: for the above loan, $9,262.50 or 2.85% for the FHA program, $16,250 or 5% for the Fannie Mae and Freddie Mac programs.

Economic Analysis: A ray of light.: Underscoring that the Federal Housing Administration is by no means a cure-all, the FHA can nevertheless become an essential cog in the housing sector recovery process. The FHA's insurance will result in increased liquidity for the housing sector, and the new, higher loan limits - - up to $729,750 in high-cost areas - - will only speed this liquidity.

Further, unlike the debacle that was many categories of mortgages in the 'old era' (no doc loans, stated income loans, teaser-rate loans etc.), these FHA insured loans will contain full documentation, feature full amortization, with a fixed interest rate, and with low or modest fees and closing costs, among other lender (and insurer) safeguards. In sum, for good-credit borrowers, the FHA insurance will result in more, low-cost, fixed-rate loans for home purchases and mortgage refinancings, at a time when the housing market and the U.S. economy needs it the most. Finally, the U.S. Congress should extend the FHA's higher $729,500 mortgage ceiling through at least the end of 2009, as one means to keep liquidity flowing into the housing sector, until the sector's recovery has been statistically confirmed by the U.S. Federal Reserve.