For years, ordinary working people in Baltimore bought homes through FHA. FHA controlled 40 percent of the real estate market. Besides having low down payments, FHA loans had protections for buyers. All loans had to be reviewed and approved by the FHA. The FHA inspectors were tough, and they insisted on sellers making all the repairs before they approved the sale. The FHA also had a barrel of appraisers that were approved.
Then two things happened. In the late 1980s, the banking community got permission from Congress to underwrite FHA loans. In other words, FHA didn’t review them anymore. That led to a lot of new lenders making FHA loans. FHA kept one control, though – they still had the appraisers. But in the mid-‘90s, the banking community went to Congress and got permission to choose their own appraisers. Suddenly the number of FHA appraisers in Baltimore grew from 40 to 100, and a lot of the bad guys abused the FHA system.
That led to the flipping scandal, and to lots of foreclosures on FHA homes. It also forced a six-month moratorium on foreclosures. FHA tried to clean up its act by making its regulations stricter. But that only led more sellers and lenders to go outside of FHA. Six years ago, FHA’s share of the Baltimore market dropped from 40 percent to about 3 percent. And, it led directly to the crisis we’re in now.
Ironically, as a result of the current crisis, FHA sales are back up to 40 percent of the Baltimore market. For low-income and even middle-income families, the only way you can buy a house today is through FHA.
If there is a silver lining to the current mess, it is that we have regulations again. Buyers have protections, and lenders are more conservative in determining who can buy a house.