People who have been in the mortgage lending business for a while, especially those who have had to collect on delinquent loans they have made, have always watched FHA lending and shook their heads.
Subprime lending has been given a HUGE black eye over the past few years, first in the early 2000’s Subprime was targeted by politicians and community groups as being predatory. (to digress for a minute, there were some people who took advantage of people’s situations, both banks and brokers, but the majority of lenders were trying to do fair loans)
Subprime lenders were targeted as charging high interest rates, and putting people in homes they couldn’t afford. The interesting thing was that the default rates on loans with >30 day delinquency averaged 3-4%. Prime loans averaged <1%. The lenders countered back that they had to charge these rates to offset the higher losses. At the time there weren’t a lot of other outlets, and competition was really the only regulator. Some states did try to pass laws to limit the rates that lenders could charge, and in the more extreme cases, all subprime lenders pulled out of the state restricting financing to the constituency of the politicians who then had to repeal the legislation.
I bring this up only because I have been keeping an eye on the governments alternative to subprime lending over the years. FHA is a “more flexible” source of funding than Fannie Mae and Freddie Mac, and has been running a higher delinquency rate over the past few years. Right now in the credit crisis, conventional loan defaults have been sitting at under 3% (if memory serves, I haven’t seen these stats for a while) but according to information that I can gather, FHA has been sitting at around 12%….. Why then are we trying to push more troublesome loans in their direction????
FHA for years has offered a unique type of financing. The maximum LTV allowed on an FHA loan was 97% meaning that the home buyer had to come up with 3% of their own funds. This 3% could come from a family member, the employer, or a non-profit organization. Someone came up with the idea a few years back that if they would create a ‘non-profit’ that the seller could gift the 3% to, that the non-profit could then give it to the buyer of their home. So basically, the seller is giving the buyer the down payment to buy their home…… Anyone confused yet?
FHA also would give loans to people that subprime companies would never dream of doing. For example people with low credit scores (<540) and doing the same type of financing thereby increasing the risk….
This creates a few issues. First, the bond traders were not all aware this was occurring. They thought it was a 97% loan.
History shows that people who have a financial interest in their home are less likely to walk away than those who have none. That could be why while only about 1/3 of the FHA loans were closed using this unique form of a down payment, over 60% of their defaults come from this.
Why is there no public outcry? This isn’t widely reported. It isn’t causing any institutional failures, it just keeps getting funding from our tax dollars! If you would like to see more details on this, visit http://whistleblower.ml-implode.com/?p=22.
Given this information, it sounds like the subprime lenders really weren’t too far off when charging higher interest rates, given that they knew they had to collect on those loans. The real issue on subprime came when they were able to offload the risk on to other entities, sell them off as bonds, and then have those bonds insured. This took the pressure to collect as the profit was already made!
Sounds like we need to get back to reality of finding lender who actually know their business, who lend money they will have to collect.
