Contributed by Chriss Street.
The American taxpayer is about to be saddled with another multi-billions bail-out of sub-prime mortgage loan losses from the stealth Federal Housing Authority (FHA) lending program that has been offering ultra-low 3.5% down payments since 2009. Delinquency rates are already at 9% in California and expanding rapidly across the United States.
Sub-prime lending drove the U.S. housing bubble from 1998 until its collapse beginning in 2007. Since that time, real estate prices have fallen by 35% across the United States. Sub-prime was first hailed for its expansion of the number of people who could qualify for a mortgage. But many of those borrowers fudged on their income and net worth levels in order to borrow more than their true incomes would allow them to repay. Since the bubble burst and many sub-prime borrowers defaulted, the U.S. government has provided bank bail-outs deficit spending stimulus that will double the national debt from $9 trillion in 2007 to $18 trillion next year.
A Rasmussen poll taken just after the JP Morgan Bank derivative fiasco reported that 71% of Americans say the government should let banks that get into financial trouble be required to fail. Banks are still blamed for causing the housing crash by lowering traditional mortgage loan requirements of 20% down payment and 680 FICO credit score.
Unfortunately, taxpayers are about to learn they are increasingly liable for another multi-billion dollar sub-prime bail-out. The U.S. Department of Housing and Urban Development website trumpets: “FHA Loans Help You.” In smaller print that help is described as insuring your loan so your lender can offer you mortgage down payments of 3.5% of the purchase price that include closing costs and fees in the loan. FHA will allow you to buy a home, remodel and refinance your existing home or convert your equity into cash through a reverse mortgage if you are 62 or older. All this FHA hoopla sounds allot like sub-prime lending, because it is sub-prime lending!
Any bank that made this type of loan on its own would be required by regulators classify the loan as a non-conforming investment and reserve approximately 25% of the amount of the loan in cash as protection against a potential sub-prime borrower default. But the beauty of the FHA insured loan program is banks collect fees for risk-free processing of loans and then sell the loans to Federal National Mortgage Corporation (Fannie Mae) or The Federal Home Loan Mortgage Corporation (Freddie Mac) for another profit.
Of course both of these government sponsored enterprises have been in operating in conservatorship (nice word for bankruptcy) since September 6, 2008 as a result of sub-prime loan losses. Treasury Secretary Henry Paulson stated “I attribute the need for today’s action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction.” That correction has resulted in 5 million completed foreclosures and another 8 million mortgages that are over 30 days delinquent or in foreclosure.
Center for Responsible Lending (CRL), founded by ACORN, recently published a study reporting that requiring a 20% down payment would prevent 60% of all FHA borrowers from qualifying for a residential mortgage. To analyze what it would take for a typical FHA borrower to qualify for a traditional mortgage, CRL selected an average family household led by a Police Officer, Teacher and Firefighter. Relying on the Department of Labor Occupational Employment wage scales, assuming the average family could dedicate half of their 5.2% average savings toward a down payment on a 6% loan for an average house. CRL estimated the typical American family would have to save for 14 years to afford a traditional 20% down payment loan.
Real estate experts have warned for years about the potential dangers of FHA mortgages, because the 1% loan fee, .5% insurance costs and 6% real estate sales commission are all rolled into a 3.5% down payment. Lenders refer to this as “hiding of the pickle”, because the borrower already has 4% negative equity when the mortgage is funded.
As home prices have continued to fall since 2009, most FHA borrowers are now saddled with mortgages that are substantially greater than the fallen value of their homes. Many of these FHA borrowers are public sector police officers, teachers, firefighters and others who expected to enjoy lifetime employment. But local governments have cut 482,000 jobs since the beginning of 2009 and public sector layoffs are accelerating in the nation’s weakest real estate markets of California, Florida, Illinois, New York, Texas and New Jersey.
The Obama Administration’s Office of Management and Budget estimated in October 20111 that FHA’s $4.7 billion capital reserves will be wiped out this year, forcing FHA to seek at least $700 million bail-out from the U.S. Treasury. Americans are justifiably angry at being required to bail-out the banks’ irresponsible sub-prime lending. Think how angry they are going be this election season, when they have to bail-out the government’s irresponsible sub-prime lending.
Cross-posted from Chriss Street’s blog www.chrissstreetandcompany.com
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