There have now been almost 170 mortgage lenders that have closed their doors.  Most of these lenders offered subprime mortgages, but many offered bread and butter conforming mortgages along with some more exotic Alt-A type mortgages.  It has been estimated that there are over 2 million homeowners nationwide who are in loans whose rates are set to adjust in the next two years thus forcing much higher payments.  There are millions more in Alt-A type loans (stated income loans, option arm loans, interest only loans, etc.) that will also see increasing monthly payments.

Since so many lenders have gone out of business subprime and Alt-A loans have basically disappeared.  It is getting increasingly difficult to find loans for customers who have less than perfect credit.

That is where FHA comes in.  FHA is basically a federally backed mortgage insurance program.  The homeowners who are in FHA loans pay an up front mortgage insurance premium as well as monthly mortgage insurance premiums into a fund managed by the federal government.  FHA approved lenders lend money to the homeowners and then the loans are federally insured by this mortgage insurance fund.  If the homeowners default on their mortgages the lenders are able to recoup a large share of their losses from the FHA mortgage insurance fund.  So far, the FHA program has never had to be subsidized by the federal government.  In other words, the premiums paid into the fund by homeowners who obtained and FHA insured loan covered all of the losses or claims against the fund by lenders who had to foreclose on delinquent homeowners.

New home buyers are able to use FHA to qualify for loans with low down payments (3% down, in some cases homeowners can even get in for 0% down..but that is a subject for another post).  However, FHA also allows homeowners who are not in an FHA loan to refinance from a non-FHA loan into an FHA loan.  FHA allows up to 95% financing with cash out to consolidate debt, etc

The advantage of FHA loans over regular conforming loans is that the requirements to get borrowers approved for FHA loans are more relaxed.  I believe that a full 50% of people who are currently in a subprime loan could probably qualify for an FHA loan right now.  What does this mean?  Well, I think it means a mini re-finance boom as everybody in subprime and Alt-A loans who can, will refinance to an FHA loan.