Stoogy FHA Program Just Great, Says Forbes

by Peter G. Miller
July 10th, 2007

Forbes magazine — that pillar of capitalism — has come out with a rave review for the FHA.

And what is it that makes the FHA program so great? According to Mortgage Lending’s Benevolent Bureaucracy, “both taxpayers and borrowers should now be grateful for the FHA’s stodgy ways.”

A report by the Government Accountability Office, says Forbes, “linked the drop in FHA’s share of the overall mortgage market (from 19% to 6%) to the popularity of adjustable-rate mortgages and other unconventional loan products generally disallowed in the FHA program, and the hassle of filing the paperwork to do an FHA loan. Of course, it is just those loans the FHA couldn’t insure –adjustable-rate and low-documentation loans — that are now showing the highest default rates.”

Forbes also makes this point:

“Greed also contributed to the FHA’s market share losses. Loan officers made fat fees selling borrowers risky interest-only and zero-down payment loans, which the FHA won’t insure. Another factor: The National Association of Mortgage Brokers told GAO that many of its members couldn’t afford to meet the FHA’s financial requirements for brokers writing FHA-insured loans. Yet those requirements don’t seem onerous; a brokerage business must have a minimum net worth of $63,000 and provide annual audited financial statements.”

One question which ought to be raised by the Forbes article is this: If the FHA program makes so much sense why is there now an effort to “modernize” it — an effort which the GAO report says will result in making the program off-limits to 20 percent of current borrowers?

A second question is this: If interest-only and zero-down loans are so risky, where were the regulators? Aren’t they supposed to put the brakes on loony loan products before they damage either the lending system or large numbers of borrowers?

As I wrote in 2005, “is it worth originating loans today which may sink lenders tomorrow? A large number of foreclosures won’t look good on anyone’s books, reason enough to tighten ARM loan standards.”

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This entry was posted on Tuesday, July 10th, 2007 at 1:15 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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