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Thursday, June 12, 2008 4:14 AM

Case for Abolishing the FHA and GSEs

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In FHA Loses $4.6 Billion - Denies Insolvency I wrote that I would eliminate the FHA. This stirred up some debate from those supporting the program. "WT", a mortgage broker of 34 years, writes ...

There are many things wrong with the mortgage market including "stated" income loans: option ARMs, predatory lending, 100% financing, etc. But I can assure FHA costs the taxpayers nothing and is one of the few good programs in the market.

I'll agree with you on the fact seller paid down payments should be stopped but you are way off base when you say the taxpayers support FHA. The people who get an FHA loan pay insurance that goes into the risk pool which still has $17 billion in it after the $4.5 billion dollar loss this year.

If most government programs required the user to pay for the cost of the program as FHA does we as a country would be much better off.

Check the facts on FHA and show me where there is any taxpayer subsidy.
Not everyone in the industry has such glowing things to say about the FHA. "MB" writes ....
As a former loan officer for over 4 years, most of which was spent in subprime, there were many interesting things I was privy to see. When it comes to quality loans, I believe subprime loans with full doc were better than what would be approved and called "prime" by the FHA.

The biggest differences one would notice underwriting Subprime vs. Prime/FHA was that we would not be able to write a loan to a subprime borrower if the DTI Ratio (debt to income ratio) was over 50%. The max DTI that FHA approves is actually as high as 65%. There is never a scenario where it is feasible to pay that much of one's monthly income servicing debt.
Alison Manning, Senior Mortgage Consultant for Equity Services, Inc. writes ....
Finally someone who gets it. Thank you.

I am a mortgage lender and a US taxpayer and am sick of the reckless behavior.

As a lender I am being told to embrace FHA which was just as bad as being told to embrace subprime and Alt-A lending. I believe in neither. If private enterprise won't take on the risk of mortgages, then why should we as taxpayers have to?

The FHA programs flaunt their 3% borrower requirement but everyone knows that can be circumvented very easily. The credit score floor is 580. 580 is atrocious! So lousy repayment history coupled with no equity equals just walk away (again).

The precedent for walking away or getting bailed out is set it seems. Past bankruptcies and foreclosures are not guaranteed FHA loan denials.

Recently, FNMA and FHMLC lowered their down payment requirements (declining markets too) and that got a big, fresh blast of free press of how strong the realtor/builder coalition is at work for the borrower. I question where the borrowers are going to get the mortgage insurance since the MI companies have not lowered their requirements (not that they should, mind you.) More smoke and mirrors.

If we get out of this mess too easily, we'll just do it again.

Thanks for your time,

Thanks Alison. Yes, I do get it. Just because the FHA has not failed yet, does not mean the FHA is a good idea. The GSEs have not failed "yet" either. But the critical point is that government has no business promoting home ownership vs. renting. It causes all sorts of economic distortions.

In this case, the GSEs, the ownership society, and hundreds of "affordable housing" programs all helped fuel the housing bubble. Icing on the cake was Greenspan's slashing interest rates to 1% and then endorsing ARMs. Every bit of that was needless government intervention.

In the case of the FHA, lives are being destroyed when they approve 65% DTI loans with borrowed down payments. Those loans are bound to fail, and are failing, leaving people will bad credit marks for years to come.

In regards to Fannie Mae, does anyone even remember what their mission statement is? Here it is:

We are a shareholder-owned company with a public mission. We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market.

Fannie Mae exists to expand affordable housing.

Is there any doubt Fannie Mae has failed the mission? The mission HAD to fail. The very act of government sponsorship of housing contributed to rising home prices. Every affordable home program in history has failed.

Finally, the FHA and the GSEs are both moral hazards. Should either blow up, risk is high there will be a bailout at taxpayer expense. Now there is talk in Congress of expanding the role of the both. Instead, both should be abolished. Neither Fannie Mae nor the FHA serves any purpose that cannot be served by the free market.

Mike "Mish" Shedlock
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