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I am normally a huge fan of the Competitive Enterprise Institute and everything they do to support the cause of freedom in the world. John Berlau, their director of the Center for Entrepreneurship has recently published a commentary which has made its way through the major papers and is available here or here.

In the commentary, Mr. Berlau argues against expanding the scope of FHA and places FHA programs in the same basket as subprime loans by throwing out a few statistics and some anecdotal evidence from particular areas. In the end, although Mr. Berlau does highlight some important areas to watch, he has some of the facts skewed just enough that it puts his conclusions at issue. The commentary states:

For the past three years, delinquency rates on the oh-so-safe mortgages insured by the FHA have consistently been higher than even those of the dreaded subprime mortgages. In the last quarter of 2006, for instance, the delinquency rate for subprimes had increased to 13.33% in the National Delinquency Survey compiled by the Mortgage Bankers Association. But in the FHA category, the rate had risen to 13.46% — “a new record.”

Nationally, FHA-backed loans do have a lower foreclosure rate than subprimes do, but one that’s nearly twice as high as the rate for all mortgages. And in certain regions, FHA-insured loans account for a disproportionate share of mortgage woes.

Please note the logical inconsistency there. Why would FHA foreclosures be lower than subprime mortgages if the delinquency rate is higher? There are several possible reasons which will indicate that FHA loans are a very different bird than subprime mortgages.

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I received a comment about one of my previous posts on the endangered non-profit assistance programs and FHA loans which mentions a trend I’m seeing in many solicitations lately.

Here’s the quote:

Earned Income DPA’s are still alive and functioning and in fact are specifically approved in the new HUD Ruling. Here is the comment from the report.

Comment: Real estate agents should be permitted to use their commission to fund the downpayment where the real estate agent is the buyer/mortgagor, because the commission is earned, and not a seller contribution or gift.

HUD response: The circumstance described by this comment are not affected by this rule, because a borrower’s earned income, such as a real estate agent’s commission, is a permissible source of downpayment.

[link to the program removed]

When you can’t use the gifting DPA’s the earned income programs can help!”

I’ve been hearing a lot about these earned income down payment systems from several sources for a while now, but I haven’t noticed them taking off yet. They offer a commission to the borrower for selling a membership of some kind to the seller of the home they are buying. I think part of the reason they haven’t taken off is that we loan officers instinctively feel that it violates the intent of the rules, if not the letter, and that it will be cracked down upon if it comes into wide usage.

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