Why Continue FHA Loan Qualification Standards?

by Peter G. Miller
September 24th, 2007

For all the talk of FHA modernization, it seems as though most FHA standards will remain in place should a new bill pass on Capitol Hill.

This is good news because the FHA program is fundamentally an insurance plan. When there are claims against the FHA program, money needed to buy homes and pay off lenders comes from insurance pools which have been funded by monthly borrower payments. Should it happen that insurance pools are depleted, taxpayers would then have to foot the bill, an unpleasant prospect given that the federal government already has enormous deficits.

In a real sense the qualification standards required by the FHA are also good for borrowers. As we’ve seen, and as we’re seeing, when underwriting standards become too liberal the value of the underwriting process itself is eroded. As a result, safe, comfy mortgage programs become iffy and dangerous to borrowers, lenders and investors.

There is, of course, a great benefit to extending homeownership opportunities as widely as possible. But there’s no sense in having programs which lead to ownership today and foreclosure tomorrow. That’s just a formula to create frustration and resentment, results which are unfair and unnecessary.

Hopefully, when the House and Senate conference discusses the different bills that they have regarding FHA reform, the result will be legislation which keeps basic program standards in place. This means that some would-be borrowers will not be able to get FHA financing. This may seem unfair but the brutal fact is that not everyone has the finances or the credit to get a mortgage, whether from the FHA or from private sources. We’d all like it to be different, but unfortunately real world economics have a place when creating financial programs.

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