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Home › Forums › Housing › Who are the buyers in this market and economy? › Arraya wrote:Anytime you have

May 11, 2009 at 9:03 AM #396405
SDEngineer
Participant

[quote=Arraya]Anytime you have a low down payment program somebody will figure out how to game the rest of the system. Once, someone figures it out, it spreads like wildfire.

http://online.wsj.com/article/SB124139474675481713.html
Everyone knows how loose mortgage underwriting led to the go-go days of multitrillion-dollar subprime lending. What isn’t well known is that a parallel subprime market has emerged over the past year — all made possible by the Federal Housing Administration. This also won’t end happily for taxpayers or the housing market.

Last year banks issued $180 billion of new mortgages insured by the FHA, which means they carry a 100% taxpayer guarantee. Many of these have the same characteristics as subprime loans: low downpayment requirements, high-risk borrowers, and in many cases shady mortgage originators. FHA now insures nearly one of every three new mortgages, up from 2% in 2006.

The financial results so far are not as dire as those created by the subprime frenzy of 2004-2007, but taxpayer losses are mounting on its $562 billion portfolio. According to Mortgage Bankers Association data, more than one in eight FHA loans is now delinquent — nearly triple the rate on conventional, nonsubprime loan portfolios. Another 7.5% of recent FHA loans are in “serious delinquency,” which means at least three months overdue.[/quote]

This is a little misleading.

Historically, the FHA has accounted for about 20% of mortgage originations, going up during bad economic times. 2% was a historically low mark for it. It’s not unprecedented for the FHA to insure 1 out of every 3 mortgages.

There was also some problems in 2007 and early 2008 in terms of regulation – primarily allowing seller funded down payments. That loophole was finally closed, and loans originated since then have performed significantly better. The loans using seller funded down payments were some of their worst performing loans.

They also fail to mention that the FHA’s mortgage insurance is more costly (and can handle a higher default rate WITHOUT passing that on to taxpayers) and that the FHA historically “cures” defaulted loans at a higher rate than the banks.