What a car-wreck.

The Federal Housing Administration guarantees loans for millions of borrowers.

The FHA is often the lender of last resort; it allows those with blemished credit to get loans, but more importantly, it allows you to borrow up to 97% of your purchase price – actually, sometimes over 100% (to cover closing costs).

Lately, having access to these loans has been a god-send – without access to FHA loans, the real estate market would have collapsed even further. Which actually IS a good thing, not a bad thing – there are plenty of people who want to buy homes, who can afford to buy homes, but tightened credit has left them with few if any options.

That’s not the problem with the FHA. The problem is, the quasi-government organization has, in the past, made a bunch of loans that went sour. But, there’s no mystery about which loans are more likely to go sour – the FHA has done studies that show that the majority of bad loans are generated from people who get “third-party assistance”.

From the New York Times:

Under the program, a home seller arranges to cover the buyer’s down payment, using financial help from a nonprofit company, but typically adds that sum or more to the price of the house. The deal has been particularly attractive to financially struggling buyers and to owners in depressed markets, according to Congressional officials.

What’s the problem? Well, the same problem we’ve seen elsewhere. First, “risky” loans are being made – in the past, to those who were ill-equipped to pay. But, worse, when borrowers faced any sort of problem making payments, they just walk away. They have no “skin” in the game, since they’ve put zero of their own money at risk. If the banks foreclose, they just chalk it up to experience and move into a rental.

The FHA proposed outlawing third-party donations, but there was such an outcry (and a federal judge ruled they couldn’t), they backed down.

The program, which accounted for less than 2 percent of F.H.A.-insured loans in 2000, now accounts for more than a third of the agency’s portfolio. Housing officials said that 60 percent of F.H.A.’s anticipated loss was directly attributable to the seller-financed down payment program.

So, if you want a 100% loan and are a bit worried you can’t find one, you’re in luck. The FHA is ready, (un)-willing, and able to help you out. No questions asked.

Source: F.H.A. Faces $4.6 Billion in Losses – By Rachel L Swarns, The New York Times

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