Subprime Lending Bust, Act II

Considering the negative impact subprime lending had on the credit markets and the global financial sector in the last couple of years, it would be only logical for most to consider the revival of the subprime market as inconceivable at this point. However, what isn’t well known, according to WSJ, is that a parallel subprime market has emerged over the past year – all made possible by the Federal Housing Administration [FHFA]

From WSJ: Last year banks issued $180 billion of new mortgages insured by the FHA….Many of these have the same characteristics as subprime loans: low downpayment requirements, high-risk borrowers, and …shady mortgage originators. FHA now insures nearly one of every three new mortgages, up from 2% in 2006.

The financial results so far are not as dire as those created by the subprime frenzy of 2004-2007, but taxpayer losses are mounting on its $562 billion portfolio.. According to Mortgage Bankers Association data, more than one in eight FHA loans is now delinquent — nearly triple the rate on conventional, nonsubprime loan portfolios. Another 7.5% of recent FHA loans are in “serious delinquency,” which means at least three months overdue.

The FHA is almost certainly going to need a taxpayer bailout in the months ahead. The only debate is how much it will cost..

How did this happen?…in 2007, the Bush FHA, Congress, the homebuilders and Realtors teamed up to expand the agency’s role.

The bill that passed last summer more than doubled the maximum loan amount that FHA can insure — to $719,000 from $362,500 in high-priced markets. Congress evidently believes that a moderate-income buyer can afford a $700,000 house…The higher FHA loan ceiling was also supposed to be temporary, but this year Congress made it permanent.

emphasis added

A major lesson I thought we learned as a society over the course of last year is that increased subprime lending is almost always associated with higher levels of delinquency, foreclosure and, in many instances, abusive lending practices. No one benefits when we push people into homes they can’t afford. Yet that’s what Congress is doing once again.

1 Comment on Subprime Lending Bust, Act II

  1. FHA has been around a long time. What separates it from subprime is the underwriting. FHA nearly disappeared from the market during the subprime boom because of the tedious process and amount of documentation needed. Sure the borrowers were similar but it had to be a primary residence. Had to put 3% in and absolutely had to be fully documented. No liar loans.

    Most of the crisis was caused by speculators driving housing up. This includes people who should have rented having dreams of gaining equity at record pace. Thus pushed them to purchase home they could not afford. This is not FHA. Once the red-headed step-child of lending, FHA may well save the housing market in the end.

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