In Defense of Subprime Loans, Part II
by Richard
You’d think that with all the sub-prime loan scandals no one would still be working that angle.
Think again.
The FHA, a product of FDR’s New Deal legislation, is alive and well, and may in fact account for one third of all loan originations this year.
For the seriously credit compromised, FHA loans require 10% cash down, but you’d be surprised at how low the bar is set to qualify buyers at just 3.5% down. Even that number can be massaged.
There is a 1.75% FHA loan origination fee, but it doesn’t have to be paid up front–it can instead be tacked onto the 30-year fixed loan term, and amortized over the payback period of the loan.
The FHA further allows contracts where sellers can pay a portion of the buyer’s closing costs…a concession to be bargained for up front, along with price and move in date…and the buyer can even accept gift money from relatives for the down payment.
What has changed is the level of scrutiny of buyer documentation.
As mentioned in part I of this post, so long as the borrower has documented W-2 wage income, this is not an insurmountable obstacle.
I support this initiative, remembering many decades back when I was scrounging up money to come up with a 10% down payment on my first house. If the loss ratio can be kept low, the program should be self-sustaining, with the upfront points and monthly 0.5% FHA insurance premium tacked on to build a kitty sufficient to cover defaults and skips.
FHA financing has helped many first time buyers qualify this year, in the process allowing them to scoop up as much as $8,000 in tax credits for those who complete their purchase by November 30th.
I expect the powerful real estate lobby to lean on Congress to punt this deadline well into 2010, to help clear out the inventory backlog still depressing many markets.
There can be no sustained national recovery until residential real estate finally reaches its rock bottom clearing price.
These FHA loans are ultra-leveraged, yet with all their supporting due diligence and documentation they are far removed from the outrageous liars loans that allowed buyers to leapfrog from rental apartments to McMansions, passing over all the intermediate trade-ups required to climb that ladder.
As a matter of social policy, homeowners still have a stronger stake in civic management and outcomes than renters, and so long as we have a government hell bent to spend money with no remorse or restraint….
Well…it could be worse.
Let’s face reality.
It will be worse.
