Reuters reported yesterday on some of the "highlights" of the new FHA "reform" bill
Existing rules for the Federal Housing Administration program cap the number of RAM loans at 275,000. But that would be eliminated under a compromise hatched in recent days between Christopher Dodd, chairman of the banking panel, and Sen. Richard Shelby, the panel’s top Republican.
The RAM mortgage cap was also eliminated in a version of the bill passed by the House of Representatives financial services panel, meaning it will likely be scrapped in the final version of the bill.
Today, FHA borrowers must offer 3 percent cash to quality for a loan so the new language would cut that requirement in half. Also, loans that exceed $362,000 are not FHA eligible under existing rules, which has effectively eliminated the program along the East and West Coasts.
Rep. Barney Frank, chairman of the House Financial Services Committee, has said he will try to lift the FHA loan limit as high as $500,000 and give officials the power to raise the limit in times of severe market disruption when the bill is taken up tomorrow.
Up until now, FHA loans have outperformed subprime loans. According to Lawrence Yun of the National Association of Realtors:
FHA loan performance has been far superior to that of the subprimes, with a default rate three times lower than that of subprime adjustable-rate mortgages.
There is the concern, though, that if FHA loans start walking and talking more like subprime loans, they will start acting more like subprime loans. If this bill passes, it sounds like it will allow the FHA to dress up wolfish subprime loans as FHA conforming sheep. Who then is stuck with the bill when all that is left is lamb chops?
Given the explicit Government guarantee an excess supply of FHA loans would “crowd out” investment directed towards “real” Government debt, effectively pushing up interest rates.
http://www.financialsense.com/editorials/kasriel/2007/0824.html sums it up perfectly.
Doh! Of course FHA loans outperform subprime. FHA still requires documentation and a demonstration of the ability to pay the mortgage! FHA has no teaser rates or resets. The issue is moot unless congress lets FHA make 110-130% LTV mortgages since most of the deadbeat subprimers are upside down in their houses. And unlike mortgage brokers and thier favorite little monkey appraisers that do what they are told FHA has very tight appraisal procedures.
This is a bandaid that will help maybe 10% of the subprimers.
Austrian-
Great article.
I just heard this morning that the veto proof bill that passed in the House takes the FHA limit to as high as 730k with 0% down!!! I didn’t see if the income verification requirement had been changed, but it wouldn’t surprise me if it did. This is par for the course, the Fed has done this for decades; bail out banks, businesses and speculators and recoup the bailout money through the hidden tax called inflation. The people who suffer the most are those who are prudent and save their money.
Tampabay-
I remember reading once that governments tax what they want to discourage and subsidize what they want to encourage. A policy of subsidizing stupidity makes no sense to me.
This rate cut was a big mistake. The dollar is getting crushed and now we will see several countries quit buying our debt and may move away from the dollar.
The whole housing mess was caused by FRAUD! You had lenders/brokers lying to their borrowers; You had borrowers lying about their income and assets; You had banks, insurance companies and hedge funds lying about the real value of their mortgages.
The robust economy over the past 3-4 years was caused by the cheap money fueling the housing boom. People saw their homes jump in value and started borrowing against them to buy cars and TV’s. Now that the money is gone, the economy must stand on earned income.
This new bill 1852 is another way to force the taxpayers to support the crappy lending practices that caused this whole mess. I can’t believe the complacency of our government.
They are trying to go back to the free money economy with governement guarantees so that it can’t lock up the mortgage market again. What a waste of taxpayers dollars. They are patching the housing bubble with concrete patches. Sooner or later, it will completely unravel and the economy will pay dearly.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/19/bcnsaudi119.xml
This article is a good synopsis of what will eventually happen.
More PR hype…raising the FHA loan limits to $500K will do absolutely zero for the disaster that is subprime. Why? A majority of subprime borrower applications were stated income, stated asset or bank statement loans. FHA is full doc — W2s, paystubs, tax returns and bank statements — which documents the subprime lenders thought that people could not find in their top dresser drawer so they gave away money at 106% LTV to borrowers who will never have the earning power to repay — And as far qualifying full doc for a $500K loan — @ 6.5% the P&I payment would be $3,160. plus taxes, insurance, and MIP… say $3,500.00 a month — the borrower would have to document more than $10 Gs a month to qualify — think about it …. if the subprime borrower earned $120K or more a year then why did they take a subprime loan in the 1st place.
No, the FHA is not going to bail out this mess nor is Fannie or Freddie. Lenders will be stuck with a massive inventory of homes for sale with no buyers … unless they offer huge discounts to people who can actually document their income … what a unique concept.