Almost One out of Two 2009 Mortgage Loans were Federally Insured

According to the number crunchers at the National Association of Realtors, 48% of all loans originated in 2009 were federally insured.

Government Insured Loans by Year. Source: National Association of Realtors

You can see a huge drop off in convential bank lending from 2004, when 9 out of 10 home mortgage loans were conventional to 2009 when only 5 out of 10 were conventionally underwritten. It’s not news to anyone that the government stepped in to the economy in a major way in 2008 to ensure that credit markets didn’t freeze. Had credit markets frozen further without any intervention, the economic bad news that resulted in credit tightening would only lead to more economic bad news, thus beginning a self-destructive and self-reinforcing pattern of economic destruction.

Before 2008, FHA loans (the largest source of government insured loans) were practically unheard of in San Francisco. In 2007 I believe there were 16 condominium buildings that were on the approved-for-FHA-lending list. 16! That number has dramatically increased since that time, with almost all new developments advertising FHA eligibility and resales in older condos triggering a time-consuming process of seeking FHA approval. And while we all might moan and bitch about the bureaucratic and time-consuming process that the FHA is known for, I hope we could all agree that an even worse alternative would be having no mortgage loans available (or mortgage loans with such challenging underwriting standards that they might as well not exist).

It will be interesting to see what the statistics for 2010 are. I have seen an easing of conventional underwriting standards from their harsh 2009 requirements (although nothing like the orgy of lending in 2004 or 2005), and given the higher borrowing costs that buyers experience with FHA or many other federally insured loans, I would expect that as conventional underwriting becomes more realistic and less defensive that borrowers will return to conventional mortgages, particularly when they have enough equity to avoid private mortgage insurance.

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