Fed Chief Bernanke Favors Risk-Based FHA Premiums

by Peter G. Miller
September 21st, 2007

Speaking before the House Committee on Financial Services, Federal Reserve Chairman Ben Bernanke said that risk-based pricing for FHA loans was a good idea:

“In modernizing FHA programs,” said Benanke, ”Congress might wish to be guided by design principles that allow flexibility and risk-based pricing. To alleviate foreclosures, the FHA could be encouraged to collaborate with the private sector to expedite the refinancing of creditworthy subprime borrowers facing large resets. Other changes could allow the agency more flexibility to design new products that improve affordability through features such as variable maturities or shared appreciation. In addition, creating risk-based FHA insurance premiums that match insurance premiums with borrowers’ credit profiles would give more households access to refinancing options.”

While risk-based premiums are certainly good for the FHA, they are surely not so good for borrowers. A study by the Government Accountability Office shows that if the new insurance plan is adopted it will produce both winners and losers:

“GAO’s analysis of data on 2005 FHA home purchase borrowers shows that 43 percent would have paid the same or less under the risk-based pricing proposal than they actually paid, 37 percent would have paid more, and 20 percent (those with the highest expected claim rates) would not have qualified for FHA insurance.”

Given that the job of the Fed is to protect the banking industry, one ought to ask: Who has the job of protecting borrowers?

Bernanke also said that “historically, the FHA has played an important role in the mortgage market, particularly for first-time home buyers. However, the FHA’s share of first-lien home purchase loans declined substantially, from about 16 percent in 2000 to about 5 percent in 2006, as borrowers who might have sought FHA backing instead were attracted to nontraditional products with more-flexible and quicker underwriting and processing. In addition, maximum loan values that the FHA will insure have failed to keep pace with rising home values in many areas of the country.”

Gimme a break: Attracted? How about in too many cases steered, mislead, under-informed and misdirected.

The Fed, under Bernanke and Greenspan, failed the public by not using the authority they have under the Home Ownership and Equity Protection Act (HOEPA) to protect the public.

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This entry was posted on Friday, September 21st, 2007 at 6:23 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.

3 Responses to “Fed Chief Bernanke Favors Risk-Based FHA Premiums”

  1. Jason Vondrak Says:

    In response to the “Gimme a break comment” The consumer must also be held accountable for their lack of due dilligence. We live in the information age where consumers have all the information they need at their fingertips to make an educated decision based on their current situation. Though drastic, This foreclosure mess is nothing more than a much needed market correction. Too many of these homeowners were chasing winners, and at the same time inflating home values. Sure, banks were loosening up their underwriting requirements which allowed borrowers to qualify for a home that they otherwise could not have. Banks saw it as a chance to “capitalize” on a market that was flourishing, and they too lost. While there are definite dishonest and unethical practices being practiced in the real estate industry, there are unethical practices in every industry. Let us be careful not to pull the integrity blanket over the banking industry as a whole, especially to those banks who practice and continue to practice w/in the legal and ethical framework of the U.S. Constitution. Too many of these homeowners were pursuing the American dream of home-ownership a bit prematurely. Too many times these naive borrowers are bailed out by these heartfelt testimonials when instead they should have done their homework. They made an investment and they lost. Home ownership is a privilege not a right. While much more emotion is tied up in home ownership than stock ownership, it is still an investment that carries a certain level of risk. We live in a capitalist society and there will be drawbacks as well as benefits to this. While this socialist approach to bailing out greedy and overextended borrowers is discouraging, it is also a much needed balancing measure. Attention all socialists: Stop spending efforts and money pointing fingers at banks and brokerages, and start making efforts to educate borrowers. Quit pushing propaganda on the American public that calls for government interference. The real estate market will take its own measures to correct itself. Extreme measures of government intervention will only further damage the real estate economy.

  2. Peter G. Miller Says:

    For a response to Jason’s post, please press here.

  3. Mortgages: Who’s To Blame For The Lending Crisis? | FHA Mortgage Guide Says:

    [...] Jason Vondrak provided us with a view regarding the Fed and risk-based premiums for FHA loans. Fair enough. Allow me to respond to the points which were raised. [...]

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