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Monday, December 24, 2007

More Government Action Vis a Vis Mortgages

The Legislature just moved to open up FHA loans for many of the borrowers currently facing hardship.
The Senate moved Friday against the worsening mortgage crisis, voting to make it easier for thousands of homeowners with ballooning interest rates to refinance into federally insured loans.

The legislation, approved 93-1, would allow the Federal Housing Administration to back refinanced loans for borrowers who are delinquent on payments because their mortgages are resetting to sharply higher rates from low initial "teaser" levels.

The bill also tries to make FHA loans more attractive than risky subprime loans by accepting lower down payments and expanding the eligibility for counseling for homeowners having difficult with their mortgage payments.

An estimated 2 million to 2.5 million adjustable-rate mortgages are scheduled to reset in the next year, jumping to much steeper rates that could cost borrowers their homes. The wave could crest during the presidential and congressional election campaigns next year, and politicians have been wrestling with what the government's response should be...

A colleague of mine pointed out that there are several things that are currently different and still need to be worked out between the Senate and House version.

Down payment/cash investment: Senate - 1.5% cash investment w/ maximum loan amount of 100% of sales price/value that includes the upfront MIP; House still has a 0% downpayment provision.

· Mortgage limit for “high cost” areas: Senate - $417,000; House – up to $729,000.

· Seller participation in down payment assistance programs:

· Moratorium on implementation of risk-based pricing: Expect a delay of a year before enactment..

· Broker surety bond in lieu of audit: It is in the House bill only. I will be shocked if this makes it in the final bill…Get those audits ready…

Just like every other government action in response to this crisis, this one is flawed and quite possibly counter productive. The main problem lies in the fact that most politicians have no idea how FHA works, and thus they can't possibly know if it will help. FHA has limits on debt to income that are much more stringent than most of the loans the sub prime borrowers are currently in. In other words, most of the borrowers currently struggling in these sub prime loans wouldn't qualify FHA if it is in its current form. If debt to income limits aren't adjusted this move is largely ceremonial.

If, on the other hand, the limits are adjusted so these borrowers would qualify for FHA, then we could be facing the same sort of crisis in FHA within a couple of years. Much of the reason that FHA has been a successful and profitable mortgage is the very limits that it has on debt to income.

Furthermore, the legislators want to increase the loan limits on FHA. What they don't understand is that FHA is a government bureaucracy. When I do an FHA loan, I am not only dealing with the bank but also the bureaucracy of the government. For instance, the FHA bureaucracy assigns a case number to each FHA loan. By increasing the limits, especially if they are increased dramatically to 700k, they will create too much demand for FHA loans for the bureaucracy to handle. FHA loans are already a bureaucratic nightmare for any loan officer to deal with. By expanding them this much, the nightmare will become obscene.

The limits on down payment are also largely ceremonial. Already, FHA only requires a three percent down payment. Dropping that requirement down to 1.5% is negligible.

Thus, the sixty four thousand dollar question is whether or not the debt to income limits will change. If they don't this is a largely ceremonial bureaucratic nightmare. If they do, this will eventually devastate FHA the way that subprime is currently being devastated.

Gotta love our elected politicians.

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