FHA Attack Not Backed By Reality

by Peter G. Miller
August 12th, 2009

According to the Wall Street Journal, we should be worried, very worried, about the growth of the FHA program.

“The FHA now insures $560 billion of mortgages — quadruple the amount in 2006,” says the paper.”Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.

“Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.” (See: The Next Fannie Mae, August 11, 2009)

This is just nonsense.

Market Share

Is it true that FHA originations are growing. Of course. The Mortgage Bankers Association reports that FHA marketshare in August 2005 was just 6.8 percent. Why? Because the marketplace was flooded with piggyback loans, stated-income mortgages with no documentation requirements, option ARMs and interest only mortgages. These loans are today at the heart of the mortgage meltdown.

The MBA also reports that 35.9 percent of all mortgage originations were from the FHA. And what is the percentage of toxic loans? That would be just about zero because many of the lenders who offered such financing are now out of business and few investors are so dumb they would buy toxic loans.

Imagine if there were no FHA loan program, a joyous thought for those who believe that any government activity which competes with the private sector is, oh, scary word, socialism. If you knock out a large percentage of all FHA loan offerings today what happens? Bet that rates and costs would rise. Now there’s something that would really help buyers and sellers….

Foreclosure Rates

But wait a minute. What about those “notoriously lax” FHA standards? Well, obviously, if they were lax we would see ridiculously-high foreclosure levels — but we don’t.

In May, the latest figures we have available, the MBA reported that “the non-seasonally adjusted foreclosure starts rate increased 26 basis points to 0.94 percent for prime loans and increased 69 basis points for subprime loans to 4.65 percent. The rate increased 15 basis points for FHA loans to 1.10 percent and increased seven basis points for VA loans to 0.72 percent.”

Why golly, there sure seems to be a difference between the 1.10 percent reported for the FHA and the 4.65 percent rate for subprime loans.

The truth, of course, is that FHA and subprime loans are very different. You can’t get an FHA piggyback loan, or an FHA mortgage without a fully documented loan application or an FHA loan with a prepayment penalty.

Here’s a better question: Did the Wall Street Journal loudly, visibly and persistently warn investors to stay away from private sector loan companies that were originating, packaging and insuring subprime loans in 2006 — you know, the companies that today are often defunct or impaired? When Angelo Mozilo won a Lifetime Achievement Award from the American Banker in 2006 did the Wall Street Journal warn of bad things to come?

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