FHA Mortgage Loans: Should They Go to Different Borrowers?
Posted by John Scott Smith on Thu, Mar 11, 2010 @ 10:34 AM
Last Friday, the Wall Street Journal reported that the FHA might be taking too much risk and stands a good chance of having to go to congress for additional money.
It says that there are too many FHA mortgage loans to borrowers who will run a high risk of foreclosure. This is the money quote, "Such underwater borrowers are generally more likely to default if they lose their jobs or have trouble meeting mortgage payments, because they can't easily sell their house." (My emphasis added.) Note, the reason that these mortgages are "underwater" defined as the borrower owes more than the property is worth is that the houses they bought have gone down in value since they were purchased, like most houses, in this country over the last several years.
Unfortunately, the Journal didn't get an FHA representative to effectively answer that specific claim. So, let me take a crack at it, using a quote from FHA commissioner, David Stevens.
As we noted in a recent blog post, when speaking in Denver, Stevens said, "our primary job is to serve the underserved buyer." Pretty good quote, actually.
The buyer who has ten or twenty percent of the purchase price to put down for a downpayment is generally not the one for whom the FHA is intended. Yes, that buyer would be a better risk because, should that person have their home value go down, they are more likely to be able to absorb the loss. But they had the capital to begin with. Borrowers who have the ability to save that kind of money are typically not needing the assistance of the government to become homeowners. It is the "underserved borrower", the one of limited means, who works for a living that the WSJ article suggests is too risky because, after all, that person might "lose their job".
Most of us would be a in pretty bad place pretty quickly if we lost our job in this environment. And, employment history is one of the things that FHA looks at in determining qualification: FHA is trying to find people who have job stability. In this recession, prior job stability is not necessarily an indicator of future job stability. So, should the FHA stop loaning money to working people who are only able to save up enough down payment for an FHA mortgage?
The argument can be made that we should limit the amount of mortgages that the FHA will insure. I have even heard arguments that the FHA should be abolished, altogether. They would say, "Let the free market handle it." That is a discussion and a conversation that we, as a nation, could have.
But, arguing that the FHA is lending to the wrong people (ie. lending to the ones to whom it is supposed to lend) is disingenuous. If they'd like to discuss whether we should keep an institution that has long been favored by the public, the same institution that has been helping the housing market since the real estate collapse started, then lets have that discussion. Let's not imply that those working people whom the FHA is intended to help are suddenly not worth our efforts. Those are not the people who got us into this mess. But, assuredly, they are the ones with the most to lose if FHA tightens up any further.
What do you think? Are the current guidelines appropriate? Or, is it time to reel in FHA lending?
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