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Are You Subsidizing California, Nevada, and Florida Borrowers?

by Gina Pogol
March 22nd, 2010

The National Association of Mortgage Brokers (NAMB) has some comments about the upcoming changes to FHA mortgage lending, and provides some interesting food for thought. In the organization’s statement issued March 15th, it claims that borrowers in most of the country are being unfairly asked to pay for those responsible for the deplorable condition of FHA’s reserves due to losses on claims.

NAMB states that the majority of FHA losses that necessitate its raising MIP are the results of losses in a few concentrated geographic areas, and that raising MIP across the board amounts to borrowers in the rest of the country subsidizing these folks.

The organization’s position: “NAMB does not believe that FHA should be instituting changes that will price otherwise qualified and eligible borrowers out of the market or require high-performing states to pay the price for those actually responsible for FHA’s depleted capital reserves.” The statement goes further, saying that if FHA must raise fees then it should do so on those most responsible for recent losses and most likely to cause them in the future.

“If the Committee feels it is necessary and appropriate to grant FHA this authority, NAMB encourages the Committee to direct FHA to properly account for default rates, credit risk, or both when implementing the change in annual MIP charged to borrowers.”

Isn’t that redlining? And illegal?

Redlining involves defining areas as undesirable for mortgage lending and making it difficult for people there to get financed regardless of their individual merit. Fannie Mae and Freddie Mac tried this for a brief period of time, issuing more restrictive and expensive requirements for loans made on homes in “distressed markets” or areas of “declining values.” The uproar this caused made them rethink their positions, and now everyone pays an “adverse market delivery charge” regardless of where they live. Which is for all practical purposes what FHA proposes to do with its increased MIP charge.

Finally, the reason for a large part of defaults in these areas is the implosion of home values and high unemployment rates, and the cure for that is home sales and jobs. Piling on and making it more difficult to buy homes in those areas may subject those economies to further duress and slow the recovery of the nation as a whole. It may be preferable to let a large group contribute a little than to let a smaller group bear the brunt of the burden. And it seems a bit unjust to make it even harder on citizens whose only crime was buying in a bad housing market or working for an unhealthy company.

Finally, while this may be the official statement of the national organization, it seems doubtful that mortgage brokers in those hard-hit states agree with a position that makes it harder to provide needed mortgage lending services in desperate locales.

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