Should We Dump Toxic Loans On The FHA?
August 23rd, 2007
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The Washington Post reports that “the Bush administration is considering broadening the FHA’s mandate to help borrowers avoid foreclosure. The administration is studying the possibility of allowing the FHA to take on mortgage refinancings for borrowers in default, something the agency is not currently permitted to do, a senior official at the Department of Housing and Urban Development said.” (See: U.S. Ponders a New Deal for FHA, August 23, 2007)
This is what you call a trial balloon. Notice that it was suggested by a “senior official” rather than by an actual human being.
On a humanitarian basis the idea of bailing out homeowners is certainly attractive. However, there are huge problems with this proposal.
First, homeowners can get FHA financing today. What the Bush Administration is really proposing is to allow refinancing without meeting current FHA standards — otherwise why would any new effort be required?
Second, while the spin is about helping “borrowers avoid foreclosure,” the real winners in this effort would be the lenders who made such loans and the investors who now hold them. In effect, Uncle Sam would pay off lousy loans when homes are refinanced.
Unfortunately, this brings us to the third item: Many troubled borrowers cannot refinance their loans because they lack equity — remember many toxic loans have negative amortization so in a large number of recent situations we have loans with growing balances and homes with declining values. Is Uncle Sam going to make loans at 100 percent or above?
Fourth, many homeowners do not have sufficient income to pay an FHA loan at current interest rates plus a .5 percent insurance fee. Is the government going to allow stated-income loan applications as private-sector lenders have been doing? You can see how well that works.
Fifth, a few years down the road, if that long, there will be massive claims against the FHA insurance fund. Taxpayers will wind up paying the bill.
Of course, by then, our “senior official” may be retired on a government pension for all his or her good work.
This entry was posted on Thursday, August 23rd, 2007 at 3:11 pm 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.