The Ready Way

FHA: It’s the end of the world as we know it…

Author: Administrator

Over the past two weeks there have been many articles highlighting the woes of FHA.  Their reserves are lackluster and it seems that people have just realized that FHA is the new sub prime.  Yes cringe, everyone cringes when you say it is the new sub prime but guess what?  That is what it is.  Lets do the math:

Low Down Payment+less than stellar credit+higher debt ratios= SUBPRIME

There have been FHA borrowers that I have not felt are qualified to buy bicycles that other lenders have helped get homes. 

In a nutshell with the way it is set up it sets the borrower up for failure.  Reserves are not a requirement of the loan and the 3.5% down paymentcan be a gift and the seller can pay 6% of the closing costs.  You basically can have someone get into a house with no money down and $50 in their checking account. So here is the million or trillion dollar question, since the tax payers will ultimately bail this bad boy out.   What happens when something goes wrong.  A car breaks down or the water heater blows.  The person has NO RESERVES.  Looks like they are not making a house payment and the foreclosure cycle starts again.

Now that a few congressman have noted the “Oh no, this will tank everything again,” they are attempting to fix FHA.  They are proposing stricter underwriting requirement or higher down payments.  They are also proposing perhaps instead of tougher underwriting and higher down payments maybe increasing the upfront mortgage insurance fee  and the monthly mortgage insurance because “it will not hurt the borrower as much.”  It will up their monthly payment but whatever right….? 

Let’s talk about the Upfront mortgage insurance fee.  Every FHA loan has a built in 1.75% upfront mortgage insurance fee.  They are proposing                 2-2.25.%  It is basically a gimme fee.  It can be built into the loan and 95% of the time it is built into the loan. And yes you will still pay mortgage insurance monthly.  Currently it is .55%, they are proposing .75%.  The one justification right now for the upfront MI fee is that the MI on FHA is cheaper then conventional.  Raise the upfront MI and the monthly MI and that is no longer true.  People will still get the loans but will be set up further for failure with the higher premiums.

I have shaken my crystal ball and I think that they will not increase the down payments or the underwriting standards but instead will up the fees.  It will be interesting to see what happens.  If they increase the down payments and underwriting guidelines it will put a stall in the market as currently FHA is the most popular loan program.  If they do not stall now they will have a flood of foreclosures later. It is lose lose.  If they up the fees it is a bit akin to taking the last $20 before it is gone.

This entry was posted on Saturday, November 28th, 2009 at 8:53 pm and is filed under Foreclosure, Government, What the media is saying. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.