At the end of August President Bush, in conjunction with the Federal Housing Administration, announced the new FHASecure program that would help “nearly one quarter of a million homeowners.” Uh-huh, sure it will. And it will also help several thousand mortgage originators churn their past clients and make some sweet profits on FHA-funded mortgages—oh and do not think the program is designed just to help struggling homeowners facing foreclosure.
The intent of FHA mortgages is to assist families purchasing homes—increase homeownership and expand the opportunity of homeownership across the socioeconomic spectrum. It is a mortgage product that has looser qualifying guidelines than Fannie Mae and Freddie Mac. Such as: higher tolerance of poor credit, allowance of non-occupant co-borrowers (meaning co-signers are not required to live in the property being purchased or refinanced), liberal use of “gifts” to assist with down payments and closing costs and low down payment requirements. FHA borrowers need not be first-time homeowners, nor must they represent the lower end of the financial spectrum to qualify; i.e. there are no income or asset limitations for FHA applicants.
This last point is important. There are many “first-time buyer” programs in the market that assist in obtaining homeownership, in California one such program is the CalFHA program. These programs generally have maximum income requirements tied to the median income of the county or region where the applicant may be purchasing a home. While there are no asset limitations, meaning an applicant using the program to purchase a $300,000 home may have $400,000 in the bank, there are income limits which the applicants may not exceed. These programs are insured similarly to FHA mortgages, but are designed to only assist first-time homebuyers who represent the lower end of the income range needed to purchase homes in their area.
While President Bush and Congress are working to expand the limits and number of eligible borrowers for FHA loans, they are not necessarily doing so to assist those on the bottom of the economic chain of homeowners, i.e. those working their tails off to pay for their mortgage and other monthly expenses. Because of the lack of income and asset limitations millionaires and waitresses have equal access to FHASecure and other FHA programs—as long as they make enough to qualify for the program.
Of great importance to this program is it appears the only credit qualification required is that the homeowners made their mortgage payments in a timely fashion up to the point their mortgages adjust. There is no guideline in regards to how they pay their other bills. Has their car been repossessed? Do they have credit cards gone to charge off or collection? Has their cellular carrier taken them to small claims court and received a judgment? Essentially those who are still serious credit risks are eligible for the program—putting the insurance pool at risk.
Finally, in touting the program, officials have said that taxpayer money is not at risk. To which I say “phooey.” Between the increase latitude of the FHASecure to lend to riskier borrowers and the proposals in Congress to increase FHA lending limits, reduce qualifying standards and possibly the equity requirement, FHA could very likely cost the American taxpayer millions of dollars. The response is that “FHA borrowers pay insurance into a pool that reimburses lenders for losses due to foreclosure,” sure they do but not enough money is paid into the pool if there is a significant increase in foreclosures of FHA loans.
Some over simplified math:
FHA loan of $200,000 has initial premium of 1.5% upfront (financed) and 0.5% per month.
Total insurance paid first year =
(200,000 x 0.015) + (200,000 x 0.005)/12 = 3,000 + 1000 = $4000.00
The $200,000 would be on the purchase of a home for about $205,000. Let’s assume the property value stayed the same and after 2 years the property went into default and foreclosure. The process takes about six to seven months, incurs legal fees, back taxes, interest. Assume the bank loses about 15% on the transaction.
200,000 x .15 = $30,000
Borrower paid about $5000 in insurance on this loan and cost the lender at least $30,000. The bank needs six other FHA loans to cover the loss on one FHA loan. If this is true across the board FHA breaks even with foreclosure rate of 15-20%.
Of the subprime loans that were made in 2005-2006 that are targets of the FHA targeted loans, approximately 10% are in foreclosure today—and growing. The majority of these borrowers were credit risks to begin with, which is why they were sub-prime, now FHA wants to put them in a taxpayer guaranteed mortgage product. That 15-20% number looks increasingly achievable as the quality of the credit risk in the pool declines and the number of insured loans goes up—oh and property values decline, most precipitously, by the way, in heavy FHA areas. Throw in the incredible fraud prevalent in the FHA origination market, the abuse of minority buyers by FHA originators, and a disaster is waiting to happen.
If the politicians and bureaucrats truly wanted to use the tool of FHA mortgages to assist those in a position to lose their home they should follow the models of CalFHA and also MediCare/Medicaid. Whereas CalFHA and other programs have income limitations, those applying for the new FHASecure to avoid default or foreclosure on their current adjustable rate mortgages should also have such restrictions—otherwise they can qualify for “normal” programs and free up the FHA money for those more in need. As well, why should the government guarantee a mortgage for a homeowner with significant assets in the bank that are not at risk should the homeowner walk away and get foreclosed on after he converts to an FHA-insured mortgage? It makes more sense to me to use the FHASecure money to assist a homeowner with little to no assets in reserves than one who has perhaps 5, 10 or even 20% of the value of the property in his bank account. But making cents (and dollars) rather than sense is what the FHA loans are for, apparently.
If the government really wants to help, it should do a few simple things: 1) raise the FHA limit for high cost areas such as California 2) raise the Fannie Mae and Freddie Mac limits nationwide 3) create standardized licensing that is national for all mortgage originators—brokers, bankers, everyone that does what I do. Make the ability to help someone with a mortgage as difficult as the SEC makes it for someone to help someone with their stocks and investments; i.e. create a Series 7 type license for mortgage originators nationwide.
There are a lot of families facing difficult times with their mortgages, for many of them I have empathy, for many others I do not. As I have stated, before any of those mortgages were funded, the borrowers had to sign a stack of paperwork, foremost among the documents was the Note that spelled out the terms of the mortgage. It is the obligation of the signer to understand what he is signing, if you trust the wrong person to tell you what you are signing then that is a shame but it still is your responsibility.
By the end of the current session of Congress we should know if FHASecure and other changes to the FHA programs are going to be in effect. In the meantime keep making your payments on time and if you are having difficulty call a trustworthy mortgage broker who will treat you with honesty and integrity (and can be reached by clicking here!).
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