Subprime Swoon Sparks an FHA Revival

The Pasadena, Calif., company is the nation's second-largest independent mortgage lender. It plans to promote the FHA loan products, among others, to offset a decline in origination volume from tightening its lending standards, it says.

In August, Bank of America launched a "national government fulfillment center" in Jacksonville, Fla., to underwrite and fulfill FHA and other government-backed loans.

American Home Mortgage(AHM Quote), which recently disclosed significant problems with its Alt-A business, was the No. 4 issuer of FHA loans last year. Wells Fargo(WFC Quote), Countrywide(CFC Quote) and National City(NCC Quote) were the top three issuers of FHA loans, according to HUD data.

Lenders are returning to FHA loans as the decadelong surge in U.S. home prices appears finally to have crested. An accelerated ramp-up in prices in recent years fed the move away from FHA loans and into more-profitable, less labor-intensive subprime and Alt-A deals.

As a result, FHA loans have been losing market share, as housing prices soared past FHA caps and lenders shunned time-consuming and costly federal underwriting standards.

"There is no low-doc, speed-easy docs done through the FHA," says Frederick Cannon, an analyst at Keefe Bruyette & Woods. "As a result, it tends to be documentation-heavy and slow. It's not terribly profitable. All these companies that made so much money in subprime loans could have been making FHA loans. There is a reason why."