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Case For “Modernization” Goes Down The Tubes

by Peter G. Miller
December 10th, 2007

There’s a great irony in the Bush foreclosure rescue plan — it does not apply to FHA loans.

Help under the Bush initiative is limited to selected subprime loans that mortgage investors elect to modify. Missing from this useless brew is any effort to help FHA borrowers.

In reality, this is not a terrible oversight. Instead it’s a tacit admission that the FHA was right to insist on traditional loan standards such as appraisals and full-blown loan applications. Moreover, the FHA has an excellent foreclosure avoidance system in place.

The catch is that the plans and protections which worked so well for FHA borrowers would be dumped under FHA “modernization.” For instance, insurance fees would be “risk based,” meaning that many of those who now qualify for FHA financing would be unable to do so under the new rules. Also, many FHA borrowers would face far-higher monthly insurance costs, thus driving them into the waiting ARMs of subprime lenders.

Given that the FHA program is working so well — and given that much of the rest of the mortgage system is not — the case for “modernization” sinks further every day.

There is, however, one change which should be made. Under prodding from lenders, a so-called technical fix by the FHA raised the annual and lifetime caps for FHA ARMs from 1 percent a year and 5 percent over the life of the (1/5) to 2 percent yearly and 6 percent over the life of the loan.

In other words, payment increase ar double the old pace under the “techincal” change. Does anyone think this is good for borrowers?

Does anyone think that delinquency and foreclosure rates have not increased under this change?

The FHA needs to go back to the old 1/5 standard — the standard still used today by the VA.

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This entry was posted on Monday, December 10th, 2007 at 3:12 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.

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