FHA Mortgage Reform Debated

by Peter G. Miller
August 9th, 2007

The world of FHA financing has been somewhat curdled by the notion that perhaps we don’t need FHA reform.

Gee, who would say such a thing?

Well, actually, I would.

In my Tuesday column for Realty Times entitled Why The Market Is Rejecting FHA Reform, I noted that “you can’t get an FHA mortgage with a stated-income loan application. You actually have to document your income under the FHA program, liar loans are not allowed.

“Also, the FHA really wants 3 percent down while private lenders have been offering loans with nothing down. In fact, private lenders have been offering loans for more than the appraised value of the property, say 110 percent financing or maybe 125 percent.

“And, of course, you can’t get an option ARM from the FHA or an interest-only loan. The FHA only issues loans which make financial sense for both lenders and borrowers.

“There is now a concerted effort to “modernize” the FHA program. The carrot is that larger loan amounts would be allowed and the FHA would permit loans with no money down. The stick? Mortgage insurance premiums would be based on individual risk rather than an identical fee for all borrowers. The result of risk-based premiums, says the GAO, is that 37 percent of current borrowers would pay higher premiums if they applied under modernization while for 20 percent premiums would not be a problem: They simply would not qualify under the new standards.”

The column concludes by saying “the major reason FHA modernization may fail is very simple: The program is coming back in the marketplace.

“After several years of falling volume, FHA activity is up significantly in 2007. As of July 15th, FHA applications are up 10.9 percent when compared with a year ago. That’s a remarkable figure, given the turmoil in the lending field.

“Rather than ‘modernizing’ the FHA loan program why not stick with the program we have? It does have a high level of foreclosures, but then government programs are intended to help people, not generate a profit. It follows that a program aimed largely at first-time borrowers will have a higher loss rate than private-sector loan programs for the well-healed, programs that did not get 34 million people into houses.”

Blogger Kate Renick at the FHA Book offers a different take:

“As anyone who has scanned the pages of FHABook knows, I am all for FHA modernization. I think it will be a great service to borrowers and make the FHA more relevant in today’s lending market. Here is a column with some opposing views presented by Peter Miller on the Realty Times site.

“I do understand Peter’s point that since FHA is currently making a comeback modernization may be unnecessary, however the aspects of FHA that need to be reformed are what allowed subprime to take over in the 90s. Just because subprime is in some hot water right now, doesn’t mean that something else won’t come along and defeat an outdated FHA again. I know we shouldn’t fix something that isn’t broken, but FHA has been broken for awhile and still needs a serious amount of fixing.”

Fair enough.

  •  | 
  •  | 
  •  | 


This entry was posted on Thursday, August 9th, 2007 at 3:42 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.

Leave a Reply

Are you a Mortgage Lender specializing in FHA Loans? Join our mortgage directory today! Homeowners click here to appy for FHA Loans