FHA Book

Mortgage Mess Goes Beyond Subprime

An interesting article appeared on the online magazine Slate last Thursday that pointed out a factor in the mortgage meltdown that most media are ignoring: stated-income loans. These loans, more commonly referred to as Liars’ Loans, allowed individuals to state their income without verification. The author, Mark Gimein, uses this great analogy to explain the situation:

Imagine a city center where running red lights isn’t something that the occasional drunken driver or road-rage victim does, but where everybody does it all the time. That’s a lot like the mortgage market in big swaths of the country one or two years ago.

He continues the analogy to describe the unbelievably high number of people (with relatively good credit) whose homes were going into foreclosure:

Think about that city center again. All those cars speeding through those red lights. And crashing.

I’ve written a lot about why I think FHA loans are, and always have been, a better alternative to sub-prime loans. The gross failure of stated-income loans shows that even when FHA was being ignored across the board, the system used to obtain an FHA Loan would have prevented this widespread practice. With FHA Loans, borrowers must prove to the lender that they have enough income to pay their loans and show that they have an employment history that is steady and they will, therefore, be more likely to continue to have such an income.

Though the FHA system clearly needs some updates (and fast), examples such as these show that the FHA process is, and always has been, much more sound than many of the popular mortgage practices used by so many over the past decade.