The House of Representatives version of the FHA Reform Bill included a provision for a trust fund to “boost the supply of housing for low income families.” The Senate version of the bill left this foolishness out, but Congressman Barney Frank has announced his intention to fight to the bitter end for an affordable housing trust fund financed by surcharges on FHA loans, while the White House has announced it will kill the bill first.

“I think the lack of affordable housing is now clear to everyone as a contributing factor to the subprime crisis,” Frank said in an interview with Reuters. “If people want to make that a fight, I think we win.”

Apparently, Congressman Frank has missed lessons from the experiences of the last 40 years when government attempts to provide housing for low income families have created ghettos that whole generations of families can never get out of. He also must have missed the best economics classes at Harvard College where he might have learned the principles which would explain how government removing the risks for financial investors probably lead directly to the real estate bubble that sent prices out of reach of the low income families.

In the same interview, Frank announced his intentions to further “scrutinize” the mortgage industry this year. He is determined to keep on with this self-aggrandizement and grand-standing until he completely destroys the mortgage industry that has been doing its best to put all these people into homes. Of course, now they can’t pay for the homes because they are after all “low income” families and that is the mortgage industry’s fault.

There have been a lot of unethical, unprofessional people that entered the mortgage business over the last few years. They have really taken advantage of a lot of people. Of course, many of those people could have easily avoided being misled by doing even a nominal amount of checking around for more information and then insisting on understanding the documents they were signing.

Not to mention the many hundreds of thousands of people who are successful home owners due to all the programs everyone is complaining about now. Everyone seems to forget that there are still more of them than borrowers in trouble.

The terrible secret that no one wants to talk about is that the rising foreclosure rates are NOT yet being caused by “toxic” subprime loans. A very large percentage of the defaults are occurring before any adjustment is made to the loans involved and an even greater proportion of the defaults are occurring in areas like Michigan and Ohio where other non-mortgage industry related economic problems are occurring. Many others are occurring because of massive amounts of mortgage fraud that was perpetrated as much by the borrowers as anybody. California and Florida are prime examples of this and the reason I say not “yet”. Option ARMs (which are prime loans, by the way) may end up adjusting themselves into massive problems there.
It also is not the mortgage industry’s fault that this generation of Americans has no conception of waiting until they can pay for something before they buy it. People get in their new homes in spite of their credit problems and then they get offered consumer credit and then they buy everything they can get their hands. When they can’t pay for all that stuff, they go back and blame the mortgage broker who got them into a home they wanted, and they picked out, and qualified for without all that debt. And they knew all along that they would need to refinance in 2 or 3 years.

How many people are having trouble now after doing 3 or 4 cash out refinances over the last few years because rates were lower and they could get cash out and still lower their payment? Started out paying $100,000 for their house and now they owe $250,000 and are having trouble? This is an excellent strategy for someone with the discipline to put the money in a good investment so they have both their same house payment and new liquid reserves that can be accessed in an emergency. Instead most of them paid for trips, or big screen TVs, and SUVs and now they don’t have ten cents in the bank.

This machine gun litany of blame is not for the purpose of finding a scapegoat or trying to say the mortgage industry has no blame. The point of it is that most of these problems can be traced back to the unintended consequences of government actions in the first place. I know that it is a natural thing for politicians to feel that they are smarter and more capable of solving our problems than we are. Otherwise they probably wouldn’t be politicians in the first place. But these problems are too complicated and have too many interactions to be effectively micromanaged by bureaucrats. We do not need anything from the politicians to fix this problem except for them to make some simple minor straightforward adjustments to the standard FHA program.

You can count the changes needed on the fingers of one hand. We need the FHA mortgage limits raised just a little. We need to be able to get borrowers into houses without a down payment as long as they have a job and a decent debt ratio. We need to adjust the mortgage insurance so that FHA doesn’t lose money by insuring loans to the riskier borrowers and the good borrowers get rewarded with lower mortgage insurance. We need to do that without penalizing young borrowers who don’t use credit and don’t have credit scores. And that’s about it.

Politicians – please quit making the problems worse with your petty politics and try to be part of a real solution.

P.S. By the way, Happy New Year!

Professional “house flipping” rings have generated huge amounts of cash which they use to help in their efforts to drag straw buyers, inexperienced loan officers and real estate agents, appraisers, and even attorneys into their crooked schemes. It isn’t the use of yield spread premium that has led to this problem. Most of the money comes from the seller side of the transactions. This will turn out to be a much larger factor in the problem than many experts think it will. Probably more significant than subprime loans, stated loans and 100% financing programs that many want to blame for the problem.

On Friday November 9, 2007 the FBI announced the arrests and indictments of 6 officers of Mortgage One Corporation, which was based in Hesperia, CA and M-1 Capital Corporation, which was based in Riverside and Rancho Cucamonga CA.

From the FBI’s press release:

The indictment alleges that the defendants engaged in a conspiracy to defraud HUD by submitting fraudulent loan application documents in order to qualify the loans for FHA insurance. The indictment further alleges that Mortgage One and M-1 Capital sold the funded loans to banks using the same fraudulent documents. HUD has identified more than 850 FHA-insured loans approved by Mortgage One and M-1 Capital that went into foreclosure and made insurance claims to HUD. Investigators estimate that the losses suffered by the government and the private lenders are at least $10 million.

With instances like these, it is amazing that the FHA program has continued to cover its costs from mortgage insurance premiums without having to dip into the treasury. In fact, in spite of such problems FHA foreclosure rates are going down!

Loan officers – please start looking closely when an “investor” who sells a lot of properties comes to you with a steady supply of loans. Particularly if they come with all the borrowers information already in hand. I know it is hard to look a gift horse in the mouth, but you must. You may have a legitimate source of new referrals that will make your living for some time to come. However, you may save your professional life by looking into the situation a little further.

Buyers – If you have had credit problems and you are looking at a home that you may feel is a little too expensive, but the seller tells you it will be no problem to get a loan, start worrying a little. If the next thing they do is offer you a little cash to help out with the payments, or the loan officer doesn’t ask for documentation of your income, run away as fast as you can. These people can get you into trouble with their schemes.

You may very well be able to get a mortgage to buy that home you want even if you have had credit problems, but it will take some effort and it will not be easy. A good loan officer can make it easier. In fact, their expertise can even be the element which makes it possible. But you will have a lot of work to do and you will have to provide documentation of your income to get a good rate.

More information on the arrests can be found in this post on the Mortgage Fraud Blog

More information on mortgage fraud can be found here

Carl Pruitt is a 22 year veteran of the real estate and mortgage businesses and specializes in using FHA loans to help borrowers with credit problems get low fixed rate mortgages.