Mortgage rates increase againINTEREST RATE ACTIVITY

Mortgage rates moved up modestly again this week.

The benchmark 30-year fixed-rate mortgage increased 5 basis points, to 6.16 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point.

The mortgages in this week's survey had an average total of 0.36 discount and origination points. One year ago, the mortgage index was 6.28 percent; four weeks ago, it was 6.12 percent.

Mortgage rates have been holding pretty steady in recent weeks, while home prices continue to drift downward. Some experts say this combination makes it an excellent time to buy a home.

However, tightening credit conditions are preventing millions of Americans from getting a conventional mortgage. Some of these borrowers now are turning to the government for help.

FHA loans soaring

Loans backed by the Federal Housing Administration are poised to make up a bigger share of the mortgage market than they have in many years. The FHA expects to insure almost $224 billion in single-family mortgages during 2008, up from about $60 billion in 2007, according to agency projections.

"They are becoming a gigantic, huge, important part of the mortgage market," says Bob Walters, chief economist at Quicken Loans.

Created in 1934, the FHA offers mortgage insurance on loans that FHA-approved lenders make to borrowers in the United States. The FHA's original mandate was to spur homeownership in the wake of the Great Depression. The agency is now the largest mortgage insurer in the world, having guaranteed 34 million properties since its inception.

For decades, FHA-insured loans were the mortgage of choice for many first-time home buyers and borrowers with substandard credit who could not secure conventional mortgages. But these loans had fallen out of favor recently as financially challenged borrowers instead turned to private-party subprime loans. Many subprime loans have low initial "teaser" rates, making payments more affordable -- at least until the rate adjusts later in the loan's term.

However, the subprime market meltdown and stricter lending standards have caused many mortgage shoppers and Realtors to give FHA-insured loans a second look. FHA-insured loans now represent "many people's only opportunity to get a mortgage," Walters says.

Attractive terms

Several factors make FHA-backed loans attractive to borrowers. The loans are not subject to the strict underwriting guidelines associated with conventional loans and often require low down payments. In addition, there are no minimum credit-score requirements for borrowers seeking FHA-insured loans, although many lenders insist on scores of at least 580.

Walters says FHA-insured loans are likely to play a pivotal role in any turnaround in the nation's sagging housing fortunes.

"(People with) very little down payment, bruised credit, higher debt-to-income ratios -- those holes are being filled by FHA," he says.

He adds that unlike subprime loans, FHA rates are "very, very competitive."

Thanks to recent legislation, FHA-insured loans also may become a bigger part of the mortgage market in communities where homes are more expensive. Congress temporarily raised FHA loan limits as part of the 2008 federal economic stimulus package. The legislation allows the FHA to increase its loan maximum to 125 percent of a market's median value.

As a result, the 2008 FHA loan cap for a single-family home has jumped to $729,750 from $362,790. This should help increase the availability of jumbo mortgages -- typically, loans that exceed $417,000.

In expensive California, the Home Builders Association of Northern California has begun promoting FHA-backed loans, saying they "may be the best option for homeownership."

Government to the rescue

FHA-insured loans are also the centerpiece of a federal program intended to help stem the tide of foreclosures threatening to swamp some local housing markets. Dubbed FHASecure, the program helps homeowners struggling with subprime loans to refinance to FHA-backed loans, the vast majority of which are 30-year fixed-rate mortgages.

From September 2007 to the beginning of April, the FHASecure program helped more than 150,000 homeowners avoid foreclosure by refinancing from subprime loans to FHA-backed mortgages, according to the U.S. Department of Housing and Urban Development.

The Bush administration recently announced expanded eligibility criteria for the FHASecure program. HUD estimates that an additional 500,000 at-risk homeowners will refinance into FHA-insured mortgages. "If you are in a subprime loan, see if you can get an FHA loan," Walters says. "If you can't, you can't, but it's worth trying."

Some critics have voiced concerns about the expanded role of the FHA, citing the potential financial risk to the federal government. Others say early returns indicate the FHASecure program is not helping borrowers who are most in crisis. But despite these concerns, FHA-insured loans appear to be catching fire after nearly burning out earlier this century.

Activity surge

Orawin Velz, senior director of the Mortgage Bankers Association, or MBA, says FHA-insured loans already are picking up some of the slack left by the shriveling subprime market. The MBA tracks mortgage application activity each week, and statistics show a steady increase in FHA applications by people trying to refinance, Velz says.

She predicts that the FHA market "will probably double originations" in the near future, helping to ease the current lending logjam, especially in a jumbo market that has undergone a "drastic decline." "That is the only kind of bright side in terms of what we see in the market," Velz says.

She encourages borrowers unable to land a conventional mortgage to work with lenders and not simply assume that they will not qualify for an FHA-insured loan.

"Maybe you need to educate yourself a little more," she says. "You might be able to fit in where you didn't before."

To find FHA-approved lenders, check the search engine at the agency's Web site.