Is FHA The New Subprime?

In the past two years we have gone from the wild west where everything is allowed to gradual government intervention to stop the bleeding that Wall Street has caused to our economy and more specifically to the housing market. The American dream of homeownership has become a nightmare that is causing everyone insomnia. With the liquidity drought of the private market, everyone has turned to Uncle Sam for a rescue. FHA loans now are becoming part of our day to day purchases as it used to be back then.... Evidently this exposure may have some consequences later if we are not careful in managing these funds. And in the end can cause more harm than good and we taxpayers will be once again the ones with pockets hanging. Do you think FHA is the new subprime?
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  • sorry about the double L "LL", too quick with the key strokes Marcelo
  • I think so Marcello. Even with the strict UW I am already starting to see a great deal of blatant fraud in FHA. Investors buying on properties and claiming primary residence, etc… The flippers are coming back with gusto.
  • Ruben,

    You make great points. The problem with previous subprime lending was that they gave the same loose standards of conventional loans (if not worse), and simply charged them a large premium for the added risk. With current FHA lending, you have much higher UW standards than in the past. If a borrower meets those standards they are offered reasonable rates and products.

    I am personally closing on an FHA loan on the 20th, and the UW has been brutal. They have called every week since initial approval to confirm my employment. I have provided multiple years worth of tax returns, on top of paystubs, etc. All of this, and I have 750+ credit and very low DTI...

    Only time will tell whether the strict underwriting will be effective. But I believe that the economy will benefit from the rush for FHA loans.
  • Hello Ruben - Great points you make! I think the truth lies in the middle of the extremes from those who think FHA is the new subprime and those who think that the guidelines should be relaxed due to lack of liquidity in the private market. In a decline market that we are in, until we hit the bottom, it's very difficult to assess a good borrower with only 3.5% or even 5% down. The paradigm has shifted. Although the economy is not helping, people are walking away because their home is underwater. And FHA is our taxes at work.
  • I dont think it is. 1) buyers must fully qualify based on income and credit. 2) As of Dec.1 the new DU system will max out most back end ratios at 45% and will only allow them to go as high as 50% with very good compensating factors such as a higher down payment, and many months worth of reserves. 3) Lenders are still very cautious when approving loans, even the smallest items are being questioned.
    Bottom line, we'll see many FHA foreclosures in the near future because FHA is the most popular loan at the moment, and in this economy we are bound to continue to see job losses, transfers, and other issues that will cause hardships. Can you imagine what kind of market we would have at the moment if the minimum down payment would be 5%+ down payment??
    I just got an update that 5% conventional loans are coming back to California, (with very strict borrower guidelines). We have not had 5% down loans in several years here, I think these are signs that lenders feel a bit more comfortable that the worst may be behind us and that we may have bottomed out.
    What are your thoughts??
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