More FHA Mortgage Problems

HWAG – which stands for “Here We Go Again” – it just seems like the government will NEVER learn, especially when it comes to the FHA Mortgage. Just like the sup-prime mortgage of the last decade, if you make a loan with almost no down-payment, marginal credit, and very little reserves after closing be ready for huge mortgage default ratios on your mortgage-loan portfolio.

Really what does FHA expect to happen when you keep doing the same thing over and over, but expecting a different result? I believe that Albert Einstein called it the definition of insanity. As long as FHA is going to require minimal down-payments, marginal credit scores, and little to no reserves after closing their mortgage default ratio is going to be too high. This amount of risk could be devastating and wipe-out the FHA balance sheet and program altogether.

In fact the United States Congress has had to through the House Financial Services Committee had to pass the FHA Emergency Solvency Act to shore up the FHA balance sheet and keep it from going bankrupt. The FHA Emergency Solvency Act will do so by implementing several actions.

The first one will be raising funds through increasing the premiums on FHA mortgages for all new borrowers obtaining an FHA mortgage. So yes you guessed it closing costs are going up on FHA mortgages. Basically it is a tax to help FHA cover all the mortgages they should not have extended to less than qualified borrowers.

Other actions include improving FHA controls which hopefully means tightening FHA mortgage underwriting guidelines. We need to get away with the mantra of “FHA – Home-ownership For Everyone” and only loan money for mortgages to people that can qualify in a way that one would reasonably expect them to repay the mortgage.

FHA says they are going to also ban unscrupulous lenders from participating in the FHA mortgage program. Wait didn’t we already address that issue last decade? let’s be straight bad lenders should be put out of business , but FHA is the one that writes their mortgage underwriting guidelines. Lenders only underwrite loans based on those guidelines. So perhaps FHA needs to look in the mirror.

How bad is it? Hers is what the American Enterprise Institute had to say:

In other words, using private-sector regulatory accounting for mortgage insurers, the FHA would be deeply insolvent today and have an estimated total capital shortfall of $35 billion under the FHA’s current capital requirement—and nearly $20 billion more under the 4 percent PMI capital requirement. In addition, based on the deterioration between September and December’s results in its effective capital position, it would be experiencing a negative trend of about $15–20 billion per year. If it were a private mortgage insurer, the FHA’s fund would have been taken over by its regulator long ago.

Bottom line if you are getting an FHA loan expect to pay a higher Mortgage Insurance Premium.

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