Friday, October 09, 2009

More FHA = Subprime

Readers who've followed my discussions regarding irresponsible home buying and lending know that I'm pretty opinionated on this topic: It's quite obvious, for instance, that the taxpayer-backed Federal Housing Administration (FHA) has become today's subprime lender of choice. (Nobody else is stupid enough to do it.)

As this week's evidence, I point you to this NY Times article:

NY Times: FHA Problems Raising Concern of Policy Makers

Oh, it's worth a read, all right. Even if you only pay attention to the real-life FHA borrowers profiled. The first one's Bernadine Shimon, a teacher in Northglenn, Colorado.

Like many Americans, Ms. Shimon has recently been through some rough times. She lost a house to foreclosure, declared bankruptcy, got divorced and is now a single mother, teaching high school English in a Denver suburb.

She wanted a house but no lender would touch her. The Federal Housing Administration was more obliging. With the F.H.A. insuring her mortgage, Ms. Shimon was able to buy a $134,000 fixer-upper in August.

“The government gave me another chance,” she said.

No, the government gave you an anchor ... and then told you to swim. Check this:

Any more than that [3.5% down payment] and Ms. Shimon, 45, would still be a renter. As it was, she cashed in her retirement savings account to come up with the necessary funds. She did not have enough to spare for closing costs, so her mortgage broker arranged a deal where the charges were wrapped into the loan at the cost of a higher interest rate. She cried when the deal was done.

The house was empty and trashed. Slowly, she is trying to bring it back to life. She spent the first few weeks picking up garbage in the backyard.

Is Ms. Shimon a good bet? Even she has no easy answer. Her mortgage payment, $1,100, is half of what she takes home every month. It is not easy to make ends meet. Teachers can get laid off like everyone else.

“The government,” she said, “is doing what it needed to do — taking a risk on people.”

I won't skid off into a ditch here with some rant about how it is NOT the government's job to "take risks on people." (Or did the publisher leave a page out of my pocket U.S. Constitution?)

Instead, I'll just keep the party going, and offer up a second FHA-borrower profile — that of Chaz Fullenkamp:

Chaz Fullenkamp, an automotive technician in Columbus, Ohio, got an F.H.A. loan even though he was living on the financial edge. “If I got unemployed, I’d be wiped out in a month or two,” he says. Thanks to the F.H.A., however, he is better off than he used to be.

Really? How, pray tell, do you figure that?

Mr. Fullenkamp used F.H.A. insurance to buy a house this spring for $179,000. The eager seller paid the closing costs and also gave Mr. Fullenkamp $2,500 in cash. He immediately applied for the $8,000 tax rebate. Even taking his down payment into account, he came out ahead.

“I knew in my heart I could not really afford the house, but they gave it to me anyway,” said Mr. Fullenkamp, 22. “I thought, ‘Wow, I’m surprised I pulled that off.’ ”

Yeah. And I'm surprised we even still have a financial system. Or a currency that's good for anything other than kindling.

And Recent FHA Results Say...

Also in the article, we're told that FHA's loan portfolio is facing, uh, a fair amount of default and delinquency issues.

But he [FHA commissioner David Stevens] acknowledged that some 20 percent of F.H.A. loans insured last year — and as many as 24 percent of those from 2007 — faced serious problems including foreclosure, offering a preview of a forthcoming audit of the agency’s finances.


The number of F.H.A. mortgage holders in default is 410,916, up 76 percent from a year ago, when 232,864 were in default, according to agency data.


Despite the agency’s attempt to outrun its fate by insuring ever-larger amounts of new loans to such borrowers as Ms. Shimon — the current rate is over a billion dollars a day — 7.77 percent of the portfolio is in default, up from 5.6 percent a year ago.

So how do Congressfolk feel about this? It's no biggie, apparently.

“F.H.A. has stepped into the void left by the private market,” Representative Maxine Waters, Democrat from California, said at the hearing. “Let’s be clear; without F.H.A., there would be no mortgage market right now.”

And a certain Massachusetts representative's response is even better:

Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it.

“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

I'd say these reactions are unbelievable, but they aren't. What else would you expect to hear from elected officials who well and truly believe there are no limits to what we can and should throw money at? (Vive la printing press!)

You know, really, I wish that this were all a bad dream. But it's not. It's real.

The financial profligacy — and often, sheer ignorance — of these people is absolutely astounding.

Labels: ,

— Posted by Michael @ 8:13 AM


Hello I have your blog connected through my Yahoo home page. I enjoy and agree with almost all of your postings.

This one is truly astounding. It is amazing the behaviors that our government reinforces with its subsidies. Today I am not grumbling over the tax burden these policies put on so many citizens of this country, today I am aghast at what the FHA is getting these people into. Isn't this what those same government officials called predatory lending - the thing that ruined so many lives.

A mortgage that will ruin some one's life is not all of a sudden a good thing, because it is given by the government rather that a for-profit lending institution.

Would giving addictive hard drugs to recovering addicts be a good thing if one weren't doing it under a profit motive?


I agree with you about government and their total ignorance of sound financial judgment. I'm sure it stems from them making the same decisions in their personal lives (i.e. not paying income taxes!).

I will say that my husband and I recently used an FHA loan in order to have a lower downpayment on our home. The $8,000 rebate topped off our emergency savings-- it was perfect timing for us, an answered prayer-- and couldn't have been accomplished if we had to put down 10%-- as I was not going to use that $8k for anything other than finishing up our emergency savings. My husband has tenure at his job and I work part-time so that we can save for a new car and fix up the house. We also have credit scores over 800. I would say we don't match the profile in that article. I'm glad that FHA was an option for us.


Barney Frank is a member of the House and not the Senate.

Anonymous Anonymous
, at 7:25 PM, October 09, 2009  

Thanks for the catch, Anon. The politicians become more of a jumbled mess to me with every passing day...


Who needs predatory lending when we have the Barney Frank and the FHA?

** Comments Closed on this Post **

Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

My financial life began turning around when I took responsibility for it.
— Dave Ramsey


Start (2005-12): ~$21,900
Currently: $0
[About Our Debt Paydown]


Savings Goal: $15,000
Currently: ~$15,115
[About Our Liquid Savings Goal]