Subprime Swoon Sparks an FHA Revival

Last year, just 314,000 FHA-insured loans, totaling $40 billion, were issued, according to the Department of Housing and Urban Development, or HUD. In comparison, $600 billion -- or 20% of the total mortgage originations last year -- were subprime loans, according to Inside Mortgage Finance.

But under current FHA requirements, approximately 18% of the "pre-reset" subprime adjustable-rate mortgages, which includes those originated last year, could qualify for an FHA loan, according to an industry report by Citigroup analysts.

"We wonder why so many subprime borrowers qualified for FHA loans," the analysts wrote. "It might be that brokers have had more incentive to steer homebuyers towards an easier-to-procure subprime loan than a tougher FHA mortgage process. However, in the current environment, when new production volume is depressed and length of processing times are no longer an issue, it might become worth their while to go through the FHA loan process after all."

The 73-year-old FHA, which is now a unit of HUD, was originally created to assist low-income and minority borrowers buy homes. But these borrowers -- likely candidates to have trouble making mortgage payments -- often end up in the riskiest loan categories, which forces them to pay high interest rates. The FHA insurance policy gets the borrower a better rate and provides relief to the lender if the customer defaults.