More Disinformation On FHA From The Wall Street Journal
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I have always respected the Wall Street Journal as a source of information. Yet all too often I find that when a subject I actually know something about is discussed, the information is off the mark! On May 4, 2009, there was an opinion piece on the online Wall Street Journal Opinion Journal entitled “The Next Housing Bust“. The opinion given in this piece may possibly have the right conclusion for all the wrong reasons.
You may certainly read this yourself at the link above, but just in case let me paraphrase it. The WSJ says that:
- FHA loans are becoming a much greater percentage of the total mortgage market.
- More than 1 in 8 FHA loans is now in default. 3 times the level of conventional prime mortgages
- The required FHA reserve fund is being decimated by losses.
- These losses are caused by higher FHA loan limits, a “campaign” to lower FHA down payment requirements, and FHA allowing closing costs to be financed into the loan through high seller contribution allowances.
- “Every study” has shown that increasing down payment requirements is the best way to avoid defaults.
- Congress should eliminate the 100% guarantee to the lender to force higher underwriting standards.
FHA is indeed becoming a larger part of the mortgage market. However, the idea that FHA losses are the primary cause of the decrease in the reserve fund is incorrect. As has been pointed out by Peter Miller at FHA Mortgage Guide, the Bush Administration took a HUGE percentage of the reserve fund – $13.5 billion dollars – because the reserve fund showed a substantial surplus at the time.
The WSJ points out that a Washington Post article reports that first payment defaults are “triple” the normal level during the past year. That Post article doesn’t really give any hard figures to back up the percentage increase but it claims that 9200 FHA loans have gone into default during the past two years. This is definitely a much higher number than in the past, which would result in a higher percentage of the original number, but is it a higher percentage of the total loans insured. That isn’t clear. Remember, the article also pointed out that FHA has an increased market share. During that two year period a rough ballpark estimate without checking the actual numbers (which I will check in a later update) would show over 2 million FHA loans insured. 9200 isn’t such a big percentage of that total given that defaults for all mortgages and all credit cards and for anyone owed money for any reason are up. I don’t know if the author of the WSJ article is aware of the record job losses in this country (which are in fact actually severely underreported in official statistics) but common sense would dictate that this is causing at least some of the increased defaults – including the first payment defaults. Sorry, but FHA is not experiencing losses disproportionate to the normal comparison ratio to prime conventional loans.
I’m not sure what kind of “campaign” to reduce down payment requirements the article is referring to. The article has the dates wrong, but I would hardly call having the down payment requirement remain the same for decades and then go up a “campaign to eliminate down payments”. Of course, I find it self-evident that increasing the down payment requirements substantially would decrease defaults. But then why have the FHA program at all? Either the policy is to help people who don’t meet the normal lending criteria or it isn’t. If you’re going to neuter the program, then just be honest and get rid of it. But if the goal is to strengthen the program for the future, there are better, more effective ways to get the job done.
Here are some of my suggestions, and you will find them justified in other posts on this site as well.
- Get rid of automated underwriting and the use of credit scores to underwrite FHA loans. The lax approvals regularly defy common sense and have been a PRIME contributor to defaults in both conventional and government insured lending. More on this in an upcoming post.
- Give FHA (and the FBI) more funding for enforcement of minimum underwriting guidelines and lender approval (most people don’t know that high defaults can get a lender cut off from FHA. Because FHA doesn’t have enough staff to enforce the rules) and for enforcement against fraud. Lack of enforcement of the rules of the system as it already exists is the other major factor in FHA defaults. Fraud has been rampant for years.
Too often the opinion leaders during this mortgage crisis have been politicians and muckrakers looking to make political or ideological points rather than the people with an interest in making the system work. Maybe the mortgage and real estate industries need to do a better job educating the public.
These industries have a unique opportunity to help use the FHA program to effectively help pull the country of this mess. There are still potential buyers out there who did not buy homes they couldn’t afford during the last few years.
I would love to hear what others think.
HUD Fiscal Year 2010 Budget Announcement
Related posts:
- FHA Mortgage Hysteria From The Wall Street Journal
- FHA Sends Letters Direct To Homeowners
- The Fed Dropped Rates – Why Didn’t Mortgage Rates Go Down?
- FHA Down Payment Assistance: An Opinion From Someone With Facts
- Trouble Brewing For FHA?
Tagged with: fha defaults • FHA guidelines
Filed under: FHA Updates
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Carl
You know I don’t care what paper or periodical it is , they all
inform as they wish without checking facts . I wish one would need a license to write about our business , every Tom, DICK and Harry out there find it is far to easy to write about the lending business. I guess the people that read that paper are the same people that never read the ARM disclosures they recieved when they got their mortgage! Thanks for the update Scott
Can you tell me why my local bank told me they can not get me an fha mortgage refi on my doublewide and 22 acres because there is no one to sell the loans to.
If I refi my monthly payment will go down about 250.00 per month why would this not be a good investment.
fha says we qualify and the bank says they can’t help
great system giving more money and guarantees to the bank rather than lowering payments for people who pay their payments they are helping people with loan mods that don’t make their payments this is not positive reinforcement. just like the banks that are small versus the big banks. they always help the wrong people.
I couldn’t agree with you more. Your fact’s are straight forward and honest. I have been in the mortgage industry for 27 years and have done hundreds of FHA/VA loans when there were no DU. We had one of the best D.E u/w and she was brilliant in her commensence underwriting where we had to provide written letters w/facts that would justify her decision to approve the loan. No Fico,etc. With regards to FHA being understaffed, they should hire as many unemployed u/w processors & QC people to work for them. They understand the mortgage business..
ZOUNDS. THERE’S THAT PETER MILLER, BUT OF COURSE,YOU DON’T TELL ME HOW HE IS INVOLVED IN THIS. THIS MAN HAS BEEN ON THE REPORTING OF FEDERAL FINANCING, IN PARTICULAR, SINCE THE YEAR ONE. I GUESS I WILL HAVE TO DO A SEARCH. I LIKE YOUR WORK BUT DON’T GET TRAPPED BY THE NEED FOR BRIEFNESS. GOOD LUCK.
Your comment doesn’t really make sense to me….but:
Peter Miller is a nationally syndicated writer. One of his blogs is located at http://fhaloanpros.com
As far as I am aware, and I have heard nor seen anything to contradict this, he has no interest whatsoever in the lending industry except that he has reported on it and analyzed it “since the year one” as you say. What he says about the FHA insurance reserve is easily verified in the public record. I linked to his report because he summarizes the issue nicely.
I, on the other hand, am tied in tight with the lending industry. My interests lie in getting rid of all the misinformation, and all the bad actors so that a good program (FHA) can survive to help more people. Because I do know a great deal about the inner workings of the industry, I feel I have a better perspective on what is really going on than many commentators who have read a few magazine articles about it, but have never sat down across the table from a hopeful possible homeowner who has had a few credit problems or had to compete against an unethical shark in order to keep the business of that hopeful homeowner and their pushy real estate agent when that shark is telling them lies and trying to convince them to bite off more than they can chew.
Excellent take down Carl. It seems like there is an organized campaign to discredit FHA. If FHA wasn’t available under the terms they are offering now, the real estate market would be in considerably worse shape. The people who have compared FHA to sub prime either don’t know what they are talking about, or have an agenda they are promoting. Prosecuting fraud would go a long way toward cleaning up the abuses.
Fine, we all agree! Now let’s all get in touch with Barney Frank and Obama and let them know that the implementation of credit scoring and auto UW on FHA is counter to their agenda. Anyone in this business pre FICO knows it is true. Banks should not be allowed to “overlay” their own scoring policy on the FHA product. Either offer it as intended or forbid them from participating. FHA didn’t cause any of this mess and it may go along way to getting us out of it, if it isn’t allowed to be destroyed by the same moron bankers!
So exactly how would it work if you got rid of AUS and credit scores? What would be the criteria used by the underwriter to determine who would qualify for a loan and who wouldn’t?
So exactly how would it work if you got rid of AUS and credit scores? What would be the criteria used by the underwriter to determine who would qualify for a loan and who wouldn’t?
Even though you asked this question with two completely different names and email addresses within 4 minutes but the same IP address, I’ll treat it as serious since I do know there are many who only came into contact with the mortgage industry after the advent of credit scores.
First, my personal opinion is that the use of credit scores and automated underwriting hasn’t increased the “accuracy” of the underwriting. I don’t think it is entirely related to greed, insider friendships or coincidence that the whole rating structure for mortgage securitization – which relies heavily on credit scoring – has been so far off the mark. I agree with the reasoning in the article I linked to in my post above that credit scores are poor predictors of mortgage success. If credit scores aren’t accurately predictive, it follows that AU doesn’t work as well. Any loan officer who has closed a loan with a debt ratio higher than 50% knows this. Who really believes that a borrower with a 58% debt ratio based on gross income has any chance of weathering the slightest economic downturn? FHA has guidelines that worked fine without automated underwriting for many decades before AU came on the scene.
Remeber how it used to be with FHA?? You took the loan app, had to ask FHA for a loan number, then got the right to ask for an FHA appraiser, then had to wait for him to take his good old time getting it to you, then you sent the appraisal down to FHA for underwriting, then they sent the appraisal back to you, then, when you had the loan package all done, you sent the whole shebang down to FHA to be underwritten. Smat RE agents who didn’t know you would ask you how long was your rate and points lock good for. 90 days I’d tell’em. I used to work for Margaretten.