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I Love FHA, But...
by Robert Franco
 | 2007/08/14 |
I love FHA, but an article in the USA Today, Good Old FHA Loans Make a Comeback, irked me a bit. The gist of the article was that FHA applications were up considerably since December - 76.8%. Yet, the article states that "FHA is flawed and in need of some major improvements." With that contention, I must disagree.
When the FHA was created in 1934, it provided the only way many low- and middle-income families could afford a home. Over the years, it changed little.
But in recent years, private lenders have launched innovative mortgage products targeted at first-time home buyers and borrowers with impaired credit. In addition, private lenders can approve applications more quickly than the FHA.
Despite the rebound, FHA is flawed and in need of some major improvements, industry experts say. "FHA is definitely a step behind where the private markets have gone," says Keith Gumbinger, vice president of HSH Associates, which publishes loan information.
If we have learned anything this year from the "private lenders" that ventured into subprime lending, its that the subprime market is extremely risky and the business model chosen by the private market doesn't work. The Mortgage Lender Implode-O-Meter is currently reporting that 117 major U.S. lenders have "imploded" since late 2006. The fall out from the subprime bust has been astonishing, not just here, but around the world.
Source of Title Blog ::
An interesting Associate Press article in the International Herald Tribune, How the Mortgage Crisis Arose and Infected the World, points out just how off-the-mark the private lending market was.
The slide started innocuously in April after New Century Financial, a mortgage lender whose principle borrowers were Americans with less-than-stellar credit, filed for bankruptcy protection.
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A month later, USB AG, the giant financial company, said its hedge fund business had lost 150 million Swiss francs in the first quarter largely on the back of investments it made in the U.S. subprime mortgage field. Then in July, Wall Street's Bear Stearns closed a pair of hedge funds after wrong-way bets on mortgage-backed securities caused them to collapse. Before the losses, the funds were worth a combined $20 billion.
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Markets came to head late last month and early in August as concern mounted that those mortgage securities may not have been as firm as people thought. It was capped by the August 6 bankruptcy by Melville, N.Y.-based American Home Mortgage Investment Corp.
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By then, banks worldwide were looking at their portfolios and finding sizable exposure and hedge funds were closing down in a bid to stave off investors who wanted to redeem their stakes, essentially, a modern day run on a bank.
On Thursday, France's biggest bank, BNP Paribas, froze US$2.2 billion held in three funds because their exposure to subprime prime mortgages in the U.S. solidified fears that risk was spreading worldwide.
Looking at the bigger picture it is hard to see why anyone would suggest that FHA should follow the lead of the private market. Yet the USA Today points out "a number of factors" that have held back FHA loans, as if that is a bad thing. On the contrary, adhering to the guidelines that have made the FHA program so successful since its inception in 1934 are what has kept it head and shoulders above the rest.
Low limits. The maximum loan amount allowed by FHA hasn't kept up with rising home prices in high-cost areas. The current FHA maximum for a single-family home is $362,790.
As a result, there are more FHA loans in Michigan than in California. In the first quarter, the median home price in San Francisco was $748,100, compared with $154,600 in Detroit, according to the National Association of Realtors.
FHA has mainly been there to help low income first time home-buyers achieve the "American Dream" of home ownership. If that is the case, why should they need to increase its lending limits beyond $362,790? Granted, the average price of a home in San Francisco is nearly $750,000, home prices in New York, Miami and a few other cities around the country are staggering as well. I certainly couldn't afford to live there; and I don't.
I live in a modest home, which I purchased for $76,000. If you can't afford a home because the FHA limit is only $362,790, you shouldn't be buying it. If the limit is increased, it would just means that there would be less money available for those who really need it.
Down payment. FHA requires a 3% loan down payment. Until the subprime market collapsed, many private lenders offered zero-down payment mortgages, even to first-time home buyers. Even now, some home buyers can get zero-down payment loans, but they usually need stellar credit.
When I bought my home, I put 20% down. It was tough, but I did it. Sure I could have bought a larger home if I was only required to put 3% down - or nothing at all. But, that would only have encouraged me to buy more home than I could really afford. The American Dream is home ownership - not a home featured on an episode of MTV Cribs.
Requiring a down-payment serves two very useful purposes: 1) it provides some security for the lender. In the event they have to foreclose, they are more likely to recoup their loss if there is some equity in the home. And, 2) it requires the homeowner to have a stake in their purchase. As your parents likely taught you, you take better care of the things you "earn," as opposed to something you were "given." Homeowners who have a substantial investment in their home are less likely to let it go into foreclosure - they will do everything they possibly can before it comes to that.
Basically, anyone who must rely on a special program to afford their first home probably shouldn't be looking for a home that exceeds the FHA limits. And, if they can't come up with a modest 3% down, they aren't ready to be a homeowner. As the subprime market has taught us, abandoning sound lending practices doesn't work.
Robert A. Franco
SOURCE OF TITLE
rfranco@sourceoftitle.com
Categories: Subprime Lending
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