Subprime Swoon Sparks an FHA Revival

Lenders hit by the collapse of the subprime market are shuffling back to an old faithful: residential mortgages insured by the Federal Housing Administration.

While a number of lenders already make FHA loans, several others, including IndyMac (NDE Quote) and Bank of America(BAC Quote), are starting to make a bigger push into FHA lending.

"Because underwriting has tightened so significantly, you're going to see people turning back to FHA to get first-time buyers into homes," says Kurt Pfotenhauer, the senior vice president of government affairs for the Mortgage Bankers Association. "We do think we will see some increase in FHA volumes in the coming year."

The news comes as banks and other mortgage companies struggle to replace the outsize profits made in recent years by lending to home buyers with less-than-pristine credit.

The so-called subprime market, covering the borrowers with the worst credit histories, has ground to a halt after a spike in defaults and delinquencies on recent loans drove dozens of lenders out of business. One of the biggest subprime issuers, New Century (NEWC Quote), filed for bankruptcy earlier this month.

Also affected has been the market for what's known as Alt-A loans, those made to borrowers with better credit histories but without full documentation. IndyMac is among the lenders that has specialized in that market and has seen its shares tank as investors worry about credit quality up and down the mortgage spectrum.