The real estate blog.

The government’s role in the housing crisis is beginning to take some twists I’m not sure anybody saw coming and that it probably shouldn’t be forced to accept.

A few different issues are beginning to brew that will force FHA and HUD to either make a stand or roll over.

First is the role as a bailout for failed sub prime mortgages. The FHA Secure program has become a stop-gap for borrowers facing foreclosure through rate adjustments but are still making their payments on time. Though touted as a success, some analysis of the numbers show that all FHA originated loans were called FHA Secure, thus lowering the impact of the program. The consensus is the program has failed to live up to expectations.

Secondly, loan limits for FHA have been proposed to be extended

indefinitely. Higher loan limits didn’t have the intended effect of providing inexpensive “jumbo” rates. Fees for originating loans at the temporarily higher limit have been raised, though the long term rates are slightly lower than jumbo. Calls for the temporary loan amounts that expire at the end of the year have been made.

Finally, the FHA itself has come out against down payment assistance programs despite losing a court case last year to Ameridream. The head of the FHA wants to end the practice which slowly pushes up house price appraisals and allows borrowers to circumvent the 3% down payment rule.

Mr. Montgomery warned that the F.H.A. would have to renew its efforts to end the seller-financed down payment program, which accounted for 35 percent of its loans in 2007.

He said the mortgages had foreclosure rates three times those of traditional loans and would push the F.H.A. to the brink of insolvency.

“Let me repeat: F.H.A. is solvent,” Mr. Montgomery said on Monday in a speech at the National Press Club. “However, no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, F.H.A. will soon either have to shut down or rely on appropriations to operate.”

Further complicating the situation is recent news that lawmakers key to the mortgage crisis legislation have received special favors from Countrywide, one of the key beneficiaries of their legislation.

My take on these issues follow. First of all, FHA should not be forced to take on crap loans in jeopardy of being foreclosed on. FHA should have the opportunity to look at certain loans and qualify borrowers for a refinance based on their current lending criteria including the FHA Secure that allows above 100% LTV and liens in second position…IF the borrower can afford it.

Mike Shedlock has said FHA should be abolished. I see no such action being needed for an institution that has been profitable and useful since its creation after the Great Depression. FHA doesn’t make loans, it simply guarantees them. Lenders make loans and insurers insure loans. FHA simply creates the guidelines and manages REO properties through its HUD homes program. I believe it’s a useful service and should continue to operate in generating home ownership.

Loan limit increases haven’t generated the impact I think they were intended to create. However, in a free enterprise system, I can’t see why any limits are established at all. Risk based pricing and fees should be developed and lenders that want to partake should. That’s essentially what’s already happened, so let’s leave it at that. The higher FHA limits should stay in place in the higher cost areas.

Down payment assistance programs are being abused, but I don’t think they should be abolished. Perhaps reserve requirements should be implemented for borrowers that utilize the program. I do think FHA has been negligent in not pricing in the higher risk for mortgage insurance on DAP loans. I also don’t place too much blame on the borrowers themselves for the higher default rates. I suspect many of these files, some concentrated in Colorado, contain fraud perpetrated by the brokers and the builders who need these programs to increase sales. Fannie/Freddie allow gift programs as well and they are currently being utilized the most by builders. These are the same builders that are dancing on the edge of RESPA laws through highly incentivized use of their own mortgage companies.

I personally don’t think 100% financing is at the root of the the mortgage crisis. 100% VA loans perform better than their counterparts.

The VA Loan Guaranty program avoided the subprime loan debacle. While delinquency rates have climbed over the past five years for subprime, FHA and prime mortgages, delinquencies have fallen for VA-backed loans.

“We never did the same things (as mortgage companies) as far as changing rules for what it takes to get a loan,” said Judith Caden, director of the VA Loan Guaranty Service, in a phone interview. “We’ve required underwriting and always had underwriting standards. We’ve always required that (applicant) income and credit be documented. We made sure that someone getting a VA loan could afford that loan.”

The key is affordability of the monthly payments and existence of reserves to fend off bad times. Lenders and brokers that ignored this are seeing the results of their carelessness and greed through increased foreclosures. For government to step in and beef up VA and FHA’s role in mortgage financing, they’re also going to have to beef up enforcement and standards for those originating such loans. Unfortunately, the mortgage industry is opposed to increased licensing.

As citizens, we should be very concerned about the political use of FHA and VA to bail out lenders in the subprime mortgage crisis. These programs should be allowed to operate as is and not be forced to take on junk loans. The Senators involved in Countrywide’s VIP loan program should remove themselves from drafting legislation that ends up helping the ailing lender. Indeed, they should resign their positions entirely for trying to draft legislation they know helps their friends while covering up their own relationship to the beneficiary.