How Troubled Is The FHA Program?

by Peter G. Miller
December 4th, 2008

Business Week has an interesting story which suggests that FHA mortgages are becoming the new subprime.

“For generations,” says the magazine, “these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there’s a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what’s happening — or incapable of stopping it. They’re giving mortgage firms licenses to dole out 100%-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.”

My concern about this report is that it may be both right and incomplete. That is, do we know that the situation with the FHA is any better or worse than with private-sector loan programs?

For example, the Mortgage Bankers Association reported in September that “foreclosure starts on fixed rate loans were 0.34 percent, an increase of five basis points, while prime ARM foreclosure starts were 1.82 percent, a 26 basis point increase. For subprime loans, fixed rate foreclosure starts increased 27 basis points to 2.07 percent and subprime ARM foreclosure starts increased 31 basis points to 6.63 percent. FHA foreclosure starts decreased one basis point to 0.95 percent and VA foreclosure starts increased six basis points to 0.57 percent, all on a non-seasonally adjusted basis.”

You have to wonder: Do not alarm bells go off at HUD when individual lenders have high localized foreclosure rates? (The rates have to localized because some areas will have steeper foreclosure rates because local economies are troubled — think of Michigan, Nevada, south Florida, etc.)

It’s not just that HUD should be concerned about lenders, it should also be concerned about individual loan officers. Every loan, without exception, should have a show the names of the loan officer, the underwriter and the originating lender. It would then be a simple matter to see which folks do best — and which do not.

The BW story has some remarkable examples and numbers, and it’s worth reading. For the full story, go to FHA-Backed Loans: The New Subprime.

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This entry was posted on Thursday, December 4th, 2008 at 3:23 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

One Response to “How Troubled Is The FHA Program?”

  1. Ditech Home Loans Says:

    If the FHA mortgage qualifying guidelines are essentially the same as they used to be, other than the loan limits, would the default rates be any different than FHA loans made prior to the sub-prime era?

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