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NYT: FHA Is Tricking People Into Mortgages

From the New York Times, of all places:

Study Shows a Pattern of Risky Loans by F.H.A.

By GRETCHEN MORGENSON | December 12, 2012

A new and extensive analysis of 2.4 million loans insured by the Federal Housing Administration in recent years shows a pattern of risky lending that could generate $20 billion in losses and harm thousands of the nation’s most vulnerable borrowers. By ignoring risks in loans it insured in 2009 and 2010, the study concludes, the F.H.A. is imperiling both borrowers and taxpayers who stand behind the agency.

History may not repeat itself. But stupidity sure does.

By the way, Gretchen Morgenson is the brilliant woman who wrote ‘Reckless Endangerment.’ She is not a typical Times reporter. Which helps explain this seemingly random act of journalism.

The analysis emerged less than a month after the F.H.A.’s auditor submitted a troubling report on the financial soundness of its insurance fund. In mid-November, the auditor estimated that the fund, which backs $1.1 trillion in mortgages, has a value of negative $13.5 billion. In other words, if it were to stop insuring loans today, the F.H.A. fund could not cover the losses anticipated on loans it has already insured…

Thankfully this report did not come out until after the elections.

The loan analysis was conducted by Edward Pinto, a resident fellow at the American Enterprise Institute, a conservative organization. But its findings were based entirely on foreclosure estimates made by the F.H.A.’s auditor as well as detailed individual loan data like ZIP codes and borrower credit scores…

In recent years, the F.H.A. has been increasing its participation in the market. After the mortgage crisis, traditional lenders withdrew from the business and borrowing to buy a home became much more difficult. The F.H.A., as well as Fannie Mae and Freddie Mac, have stepped in to fill that void. While Fannie and Freddie have tightened their loan standards, the F.H.A.’s underwriting requirements have remained liberal.

To receive F.H.A. backing on their loans, borrowers must have a credit score of at least 580 out of a possible 850, and they are required to put down at least 3.5 percent. F.H.A. allows the borrowers whose loans it insures to have a monthly housing debt payment of around 30 percent of their incomes.

These are incredibly low requirements.

Still, 40 percent of the 2010 loans in the F.H.A.’s insurance portfolio were made to borrowers whose total monthly debt payments were greater than 50 percent of their monthly incomes or had a credit store of less than 660, the study found, a dangerous level.

It sure sounds like the government is trying to trick people into loans they might not be able to afford.

F.H.A. does not adequately monitor the risks in the loans it backs, the study said. Moreover, it does not charge guarantee fees appropriately adjusted to reflect these risks…

The concentration of loans backed by the F.H.A. in areas of subpar family incomes is another warning flag, according to the study. Of the 2.4 million loans studied, some 44 percent were made to borrowers in ZIP codes where the median family income was below that of the corresponding metropolitan area. These loans will most likely generate foreclosure rates averaging 15 percent, the study concluded, well above the overall 9.6 percent average the F.H.A.’s auditor has projected for those years…

But, to be fair, if the FHA doesn’t do this they will be sued by the DOJ for ‘redlining.’

This article was posted by Steve on Thursday, December 13th, 2012. Comments are currently closed.

2 Responses to “NYT: FHA Is Tricking People Into Mortgages”

  1. P. Aaron says:

    Our Gov’t: Spreading the misery…blame ‘de-regulation’.

  2. GetBackJack says:

    Much as I despise the NY Slimes, there’sa grain of truth to this. Because if the money doesn’t flow at an unnaturally aggravated non-market-demand rate the whole house of cards collapses.

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