Fed Chief Bernanke Favors Risk-Based FHA Premiums
September 21st, 2007
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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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