Trouble in FHA Land! April 9, 2008Posted by shaferfinancial in Uncategorized.
Tags: bailout, FHA, foreclosure, government costs, Mortgage
Well you knew it was going to happen. FHA is reporting that it will go into the RED this year for the first time ever in its 74 year history. No doubt we the tax payers will be picking up the bill (as much as $1.8 Billion) soon. Now FHA has always paid its own way in the past, so what is going on?
Well, its really the same old story. First, a quick review of how this program works. FHA a quasi government entity insures loans for folks with low FICO scores and little down payment money. In short FHA loans only require the buyer of real estate to put down 3% plus a funding fee meant to cover potential losses and of course closing costs. This was a solid program for first time home buyers and lower income folks. However, starting in 2000 it was not the best deal around. At that point sub-prime mortgages were actually less expensive and allowed for 100% financing sometimes even financing closing costs. There was no funding fee for subprime mortgages. So folks with little money and poor credit scores switched from FHA funding to sub-prime mortgages from 2000-2006. However, there was one part of the FHA program that was popular; the seller financed down payment assistance program. In 2000 this part of the program represented only 2% of all FHA loans but blossomed to over a third of the program by 2007.
Here is how it works. The seller pumps up the sales price of the home, say 5%. A third party program comes in and makes a gift of the 3% down payment requirement and closing costs. At closing the seller then refunds back to the company the additional 5% that the seller added to the purchase price. Pretty nifty, huh! The buyer gets a FHA loan without having to come up with any money!
Well, turns out that people involved in the seller financed dp assistance programs are foreclosing at 4 times the rate of the other FHA folks. So the funding fee’s designed to cover the historical foreclosure rate for the FHA program is not enough to cover the program.
Of course consumer advocates defend this program. And a perfectly good program that is self financing is looking for a bailout because of these no downpayment folks. And what did it take to accomplish these loans? Well a appraisal that is higher than the agreed upon price!
Starting in the 1990’s there was alot of pressure put on lenders to start lending to minority folks at the same rates as white folks. There was also much pressure to lend in area’s with depressed real estate. Finally, there was pressure to increase the percentage of home ownership in this country. Now all of these ideas are morally correct ideas. We should not discriminate, we should try to increase home ownership, and we should not red-line.
But, the way it was done is to lower credit requirements, reserve requirements and down payment requirements. We now understand where those requirements should not go. It is among folks who put little or no money into purchasing real estate and had credit problems and had little or no reserves where the foreclosure problems reside. It is that simple folks.
Now, unfortunately, the pendulum has swung the other way. People with reasonably good credit and a little cash are being held out of the market or at the very least have to pay much more to get into the market. Interestingly, FHA loans are on the upswing with the sub-prime market gone. But with a third of them going to the Seller financed DP Assistance Program we are only adding to the government bailout that is going to be required.
Oh, I am sure we will hear about all these folks who were victimized by being able to buy real estate with no money and poor credit!