Wednesday, October 21, 2009

FHA Mortgages: Buckle Your Seatbelts For More Defaults

In yesterday's Wall Street Journal, Nick Timiraos wrote,

"Some 59% of new home buyers are using government-backed loans from the FHA and other agencies, according to a survey of home builders by John Burns Real Estate Consulting, an Irvine, Calif.-based consultancy. The FHA accounts for nearly half of all mortgages, while loans from the Department of Agriculture and the Department of Veterans’ Affairs account for another 10% of all loans for new homes.

The government’s share of the market rises even higher in certain areas. In Northern California, for example, builders said that the government accounted for 76% of all mortgages, while the government share stood at 65% in the Midwest and 62% in South Florida."

Further, FHA mortgages may be had with as little as a 3% downpayment!

Mind you, FHA was originally intended to be the government-backed housing finance program for lower-income Americans. How in the world did it morph into accounting for more than half of new home loans? With the VA coming in for another 10%?

A few days earlier, on last Friday, to be precise, Peter Wallison of the American Enterprise Institute wrote a piece in the Journal entitled, "Barney Frank, Predatory Lender."

Wallison details Frank's push for governmental support of questionable mortgage lending, including requiring the GSEs to make 55% of their mortgage purchases "affordable," meaning lower-quality.

He notes, regarding the presumption that Wall Street firms cavalierly originated and securitized bad mortgages of their own volition,

"There was always a problem with this theory. Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA- all government agencies or private companies forced to comply with government mandates about mortgage lending."

Wallison's last sentence is a clear warning about a rerun of the past few years' mortgage mess,

"If the financial crisis was caused by subprime mortgages and predatory lending, the government's own policies made it happen."

Buckle up!

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