FHA Book

WSJ Addresses FHA Problems

The Wall Street Journal posted an article the other day that is very critical of two FHA issues that I also happen to be very critical of:

The dangers of zero down are assessed:

The biggest reason the FHA lost so much money was a scam called the “downpayment assistance program.” Under this program, builders or mortgage originators make a loan to low-income homebuyers, and then arrange for a third party to pay the downpayment, so the loan qualifies for FHA insurance. This means borrowers have no skin in the game, and in many cases have negative equity because the value of the homes are often inflated.

Borrowers could bet on the upside of the market at no cost to them. And thanks to the 100% FHA insurance against default, lenders were guaranteed full repayment whether or not the loan is ever repaid. Until recently, lenders even got a tax write-off for their “charitable contribution.” Everyone won – except the taxpayer. Now even the FHA finally agrees that this program invites widespread fraud and wants to end it. But Barney Frank, who heads the House Financial Services Committee, is insisting that it continue.

One lesson from the debacle is what happens with low or zero downpayment FHA loans: They go bust. The Government Accountability Office finds that default rates are about three times higher than on conventional loans. So why in the world is Congress promoting a new FHA bill to lower downpayments to 3% and in some cases even to zero?

Although I find the article to be a bit overly critical when it comes to the FHA program as a whole, I wholly agree with DPA and sub-prime issues.