Originally published 04:45 a.m., October 19, 2009, updated 05:43
a.m., October 19, 2009
Easy-money mortgages still provided, by the feds
Patrice Hill
So you thought easy-money mortgages with little or no down payment
for
people with bad credit was a thing of the past? Think again.
You can get just such a loan today - and it's guaranteed by the
federal government.
Loans insured by the Federal Housing Administration (FHA) have
become "the new subprime," and these loans are exposing taxpayers to
the same kinds of soaring default rates and losses that brought down
Fannie Mae and Freddie Mac as well as destroyed many banks and the
private market for mortgage loans.
While private lenders learned a lesson from the mortgage crisis
and are shying away from easy-money loans, the FHA has stepped into the
breach. The agency has provided backing for 37 percent of all mortgages
used to buy homes this year.
After the collapse of much of the private mortgage market last
year, Congress and the George W. Bush administration greatly expanded
the FHA's original Depression-era program aimed at assisting sales of
modestly priced homes by more than doubling the ceiling on loans that
the agency can insure to $625,500 while maintaining its loose lending
terms - ensuring that nearly any home sale could be covered by the
agency.
The FHA's predominance was enhanced further this year when
Congress lifted the ceiling to more than $729,000 for major urban areas
and passed an $8,000 tax credit for first-time homebuyers that can be
accelerated for borrowers to use as a down payment on FHA loans and
avoid any cash commitment to their home purchases.
While these changes were intended to be temporary and expire by
the end of the year, given the fragility of the housing and mortgage
markets, Congress is considered likely to extend them this fall.
The significant expansion and liberalization of FHA's loan
programs is enabling Americans to go back to many of the same bad
credit practices that analysts say were at the root of the housing
crisis, likely feeding further waves of default and foreclosure. But
this time it is the taxpayer - not the banks - who could end up holding
the bag.
Whitney Tilson, manager of investment firm T2 Partners LLC and
author of "More Mortgage Meltdown: 6 Ways to Profit in These Bad
Times," called "cataclysmic" the surging default rates of more than 30
percent on loans insured since 2006 by the FHA. That is not far below
the 40 percent rate of default and foreclosure on the notorious
subprime loans that ignited the credit crisis.
"The FHA's portfolio is exploding and the taxpayer is now on the
hook for 100 percent of the losses," he said.
"I find it hard to distinguish between the actions of FHA and
the self-denominated subprime lenders," said Edward Pinto, a former
chief credit officer at Fannie Mae who recently testified before a
House panel on FHA's growing default problems. "The results are the
same - unsustainable loans that prolong and perpetuate our nightmare of
foreclosures."
Mr. Pinto estimates that 20 percent of the FHA's entire
portfolio of $725 billion mortgages will end up in foreclosure - a rate
recently borne out by estimates FHA provided to Congress. He predicts
that the agency will require a taxpayer bailout within two to three
years.
One reason defaults are soaring is that the agency is
attracting nearly all of the business of homebuyers who haven't saved
enough to make down payments, he said. Loans with little or no down
payments have high rates of default because the borrowers have little
financial stake in losing their homes to foreclosure.
The agency requires a minimal 3.5 percent down payment - far
below the 20 percent now required by private lenders. That's very
little "skin in the game," especially in today's market where the
buyer's equity can be quickly wiped out, Mr. Pinto said. Home prices
have fallen an average of 30 percent nationwide.
Many borrowers have been able to avoid even that minimal level
of personal investment in their homes. The government is enabling these
buyers to put up no cash at all by allowing them to get advanced
payments of the $8,000 homebuyers tax credit through arrangements with
nonprofit housing groups and state housing agencies. The tax credit can
be used the same way to pay closing costs.
Beyond the loosened standards on down payments, the FHA remains
willing to make loans to people with low credit ratings, even those
with histories of default, foreclosure or bankruptcy. Those with
histories of default are far more likely to default again.
Even though the number of defaults is escalating, FHA
Commissioner David Stevens insists that the $30 billion of insurance
reserves will cover any losses and has repeatedly denied that the
agency is headed toward a taxpayer bailout. The reserves are
replenished by borrowers, who pay the agency yearly premiums of 0.5
percent of the loan and an upfront 1.5 percent payment when their loans
close.
But analysts say his optimistic assessment is based on the
shaky assumption that the nascent recovery in the housing market will
quickly put an end to falling house prices and burgeoning default and
foreclosure rates. Many private economists predict that the rates of
default will continue to rise even after housing sales recover. They
also say home prices may continue to fall for a while longer, leaving
increasing numbers of homeowners underwater on their loans and more
prone to default.
In another defense of the agency, Mr. Stevens points out that
the average credit scores of FHA borrowers has risen in the past year
as the disappearance of private home loans sent buyers flocking to the
program. But the deep recession also is causing increasing defaults
among people with better credit, who cite the loss of income because of
layoffs or reduced work hours as their principal reason for not being
able to make their mortgage payments.
The FHA has a program that will help people who missed two or
three payments under such duress by using the insurance fund to make
those payments for them and then recouping the money when the property
is sold - a provision that has been used in about 400,000 cases so far
and could help to bring down the foreclosure rates on loans that go
into default as a result of the recession.
The agency recently announced steps to tighten its standards
for lenders to counter concerns about rising defaults as well as
criticism from the agency's inspector general that its program is
riddled with fraud and corruption by lenders. The agency proposed
requiring lenders, many of whom were subprime dealers, to assume
liability for the loans they make and have a net worth of at least
$1.25 million.
The agency also is considering tightening standards for
borrowers who pose multiple risks, such as those with histories of
default. But while the agency has moved quickly to crack down on lender
abuses that likely contributed to high default rates, Adam Sharp, a
financial adviser and blogger for BearishNews.com, said it is
perplexing that the FHA has not moved to tighten borrowing standards
that have emerged as the lowest in the post-crisis mortgage market.
"I suppose responsible lending would spoil the housing
recovery," he said. "The FHA has effectively replaced subprime lenders
who went bust. They're under pressure to prop up housing prices, and
are insuring heaps of risky loans in an effort to do so."
The FHA's backers in Congress, led by House Financial Services
Committee Chairman Barney Frank, Massachusetts Democrat, maintain that
high default rates are the price of Congress' decision to use the FHA
to prevent a complete collapse of the housing and mortgage markets in a
time of extreme distress.
"By keeping affordable loans flowing, particularly to the
growing ranks of first-time homebuyers, the FHA has been critical to
our nation's economic and housing market recovery," said U.S.
Department of Housing and Urban Development Secretary Shaun Donovan.
The FHA is part of HUD.
But even some liberal housing advocates say the FHA's spectacular
expansion could be worrisome.
The agency's low downpayment requirement "may be workable under
some circumstances, but this practice is likely to run into problems in
the context of declining house prices and the most severe downturn
since the Great Depression," said Dean Baker, co-director of the Center
for Economic and Policy Research.
"Furthermore, given the huge ramp up in its lending in a very
short period of time, it seems unlikely that the FHA has been able to
adequately scrutinize the loans that it is buying."
While any bailout of FHA likely would be small in comparison
with the gigantic sums spent bailing out Fannie Mae and Freddie Mac,
Mr. Baker said, "the crippling of the FHA as a lender would be another
blow to the housing market" and would be "a serious political blow to
efforts to ensure access to mortgages for moderate-income families."
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