Sen. Dodd Favors “FHA Modernization”

by Peter G. Miller
August 13th, 2007

Sen. Chris Dodd (D-CT) has come out in favor of FHA modernization.

This is important, or not important, for two reasons:

First, Dodd is chairman of the Senate Banking, Housing and Urban Affairs Committee. He has substantial clout if not the controlling voice in FHA reform.

Second, we don’t have the specifics of what Dodd wants to modernize. The FHA could certainly use restructuring, but does that mean a borrower-friendly FHA or something that raises borrower costs and reduces borrower access to the system?

Specifically, here’s what Dodd said:

FHA loans have long been a source of quality mortgage credit for working families. FHA needs to be modernized to ensure that more Americans can have the benefits of an FHA loan. These benefits include: a ban on prepayment penalties; 30-year fixed-rate mortgages so borrowers know they have to pay a set amount each month, rather than rates that can climb and force borrowers to pay more over time until they can’t pay anymore; and loans that are based on a borrower’s ability to pay the full cost of the loan, including associated taxes and insurance.”

Dodd also came out against prepayment penalties for subprime loans. This may hint at where he would go with FHA modernization.

“These penalties, which are nearly non-existent in the prime market, often punish or prevent borrowers from refinancing their loans just when their monthly payments become increasingly burdensome. By trapping borrowers into paying exploding mortgage payments, prepayment penalties significantly increase the risk of default and foreclosure. For that reason, these penalties should be prohibited for all subprime mortgages.”

Already, of course, there are no FHA prepayment penalties.

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7 Responses to “Sen. Dodd Favors “FHA Modernization””

  1. joe Says:

    I think fha reform or modernazation is essential to the housing market.

  2. Peter G. Miller Says:

    Joe –

    Why do you think reform or modernization are essential? Your view is welcome, but you need to tell us why you have such a perspective.

  3. John Says:

    Modernizations is obviously a move in the right direction. Every market should have it’s own adjustments. Mortgage defaults are affecting everyone in all markets. In Florida, the real story is not being told.

    The borrowers who are defaulting on those famous 2/28 and 3/27 ARMS aren’t doing it because they can’t afford the rate increase, which in manny loans could be a few hundred dollars a month more. Don’t get me wrong, that could be a big difference for some. The reason they are defaulting is because there property taxes have gone up 100-200% since they did there loans. and there insurance premiums, thanks to several hurricanes have gone up as much as 400%.

    The average property taxes in South Florida is $5,000.00 per year and the insurance costs are up to $7,000.00 per year for a $300,000.00 home.

    Sure the stated home loans where crazy to begin with, but there’s a lot to be said about the local governments response to the issues mentioned above.

  4. Cappy Says:

    I, too, agree that FHA reform is essential to the market place. However, my beliefs are focused in a different direction. We need far more stringent underwriting for mortgage loans in general, and FHA in particular. I do not see the advantage in loosening restrictions for FHA, and creating the same debacle in the FHA market as is currently happening in subprime. Common sense, ladies and gentlemen.

    If we allow for more liberal underwriting, we the taxpayers will be responsible for the ensuing mess (if we don’t wind up paying to bail out subprime already). Place more responsible people in homes (theorhetically anyway), and give the banks less leeway in the determination process by giving them even stricter guidelines they must follow.

    I understand this is the least popular stance, and also one that would create more headaches in the current market, but it is not the current market that I am concerned with. I am ill of always having to be the one (as a taxpayer) to pay for everyone elses stupidity and greed. It is time to re-establish the housing market under more sensible and realistic terms.

    Will some good people suffer in the short term? Yes, probably. But remember, there is always ‘A’ paper!! Don’t you agree that it is time that customers start bearing the burden of good credit? Don’t you agree it is time for some fiscal responsibilty from the average citizen? Owning a home is not a ‘right,’ but rather a ‘privelege!!!’

  5. Peter G. Miller Says:

    What’s interesting about the FHASecure program is that it leaves underwriting standards in place with one notable exception: A more liberal standard for those with toxic loans who have late or missed payments after the mortgage has re-set.

    As to monthly payment increases, according to a senior HUD spokesman some increases are doubling and tripling monthly payments. There are huge increases out there.

    Asking borrowers to better understand a transaction that is rare and unusual to them is like asking a patient to perform an operation and be responsible for the results. The better choice is to make the lender responsible for assuring that a borrower has a suitable loan and the best possible rate and term.

  6. Cappy Says:

    Or in other words, completely absolve the borrower from any responsiblity for their own actions. “It’s not their fault, their victims….” yeah, I think I’ve heard that one millions of times before.

    **Asking borrowers to better understand a transaction that is rare and unusual to them is like asking a patient to perform an operation and be responsible for the results.**

    Complete hogwash!!!

    The Note on mortgage transactions is clearly spelled out in black and white (and if you can’t read, or read enlish-why are you purchasing a home in the first place? Again, a personal responsibility issue…). Additionally, the Truth-in-Lending disclosure shows you the worst case amortization. Also, on refinances you have a three day right of rescission, allowing enough time for a borrower to look over the documents and question anything that does not seem ‘above board.’

    One more idiotic complaint I’ve heard issued by borrowers is that they purchased a newly built home, and when they bought it, the taxes were only one or two hundred dollars per year. Did they really think that this was the actual tax value on a brand new home!?! If so-whose fault is it when the assessed value becomes one or two THOUSAND dollars per year or more? Is it the lenders fault? Perhaps partially-IF SAID ADJUSTMENT WENT UNDISCLOSED. However, even if this were the case, the vast majority of borrowers that purchase new construction homes are NOT first time home owners. If the home you previously owned was a)smaller, b)older, or c)both, and your property taxes were HIGHER THERE-I have absolutely no sympathy for your ignorance and/or stupidity.

    But I digress. As far as arms doubling and tripling in payment amounts-yes I believe that. But I still stand on the fact the borrower needs to be responsible for at least understanding the terms of the loan they are putting their signature on.

    This does not even take into account all of the people that got an arm loan, and made late payments during the fixed period. The purpose of these loans is for people to begin to develop a good credit history of making on-time payments on their mortgage loans. The reason the overwhelming majority of sub-prime borrowers got sub-prime loans is that their credit was abysmal in the first place!! So removing culpability from the borrower and having the government bail them out sets a ludicrous precident. How pitiful our society is becoming…

  7. Peter G. Miller Says:

    Unfortunately this is not a subprime issue. Jumbo borrowers and those who seek Alt-A loans are also having problems. Builders who construct luxury homes have seen sales plummet.

    The issue is toxic loans, sold to borrowers, not loans to help anyone’s credit.

    As the Mortgage Bankers Association reported today (Sept. 6th), “the performance of prime and subprime adjustable rate mortgages (ARMs) is contributing significantly to the overall results.”

    Borrowers rely on lenders, loan information is controlled by lenders, paperwork is in the lender’s usual form and the idea that borrowers have enough information or experience to make sensible mortgage decisions is a joke.

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