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FHA Loans — Let’s Be Honest About It

by Peter G. Miller
June 12th, 2007

I get a lot of email from lenders who moo and mutter that I am unfair to their treasured little practices. For instance, I have long been loudly opposed to the widespread use of interest-only loans, option ARMs and the grand daddy of all bad ideas, the stated-income mortgage application.

None of these things are an issue with FHA financing. Get an FHA loan — or, for that matter, a VA mortgage — and you’ve got long-term financing with no surprises.

But what about loans that don’t come from the FHA?

“Let’s be honest about it,” says Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation, “Hybrid ARMs were never made based on the assumption that the borrowers would be able to make the payment once the loan reset. They were designed as two- or three-year “bullets,” with the assumption that home appreciation would allow the borrower to refinance at or before reset. Given current conditions in the housing market, this business model is no longer viable. But market participants should not now claim to be shocked that borrowers are in distress.”

Short-term mortgages, of course, are a great product — for lenders. It means borrowers must ultimately go back and refinance properties, thus generating more fees and charges for lenders.

Hopefully the current calls for FHA reform will not create mortgage loan products with reduced safety and security. Let’s be honest about it, that would be a tragedy for borrowers.

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This entry was posted on Tuesday, June 12th, 2007 at 7:29 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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