BluefoxToday blog : New mortgage fiasco in the making?

New mortgage fiasco in the making?

The financial system has taken it to the chin repeatedly over the last few years thanks to multiple factors, one of which was the subprime home loan product. Many eager borrowers were able to secure funding for a home purchase using its flexible underwriting criteria although many really didn't have the means to keep making payments in the long term. The loans were structured with the idea that the real estate market would continue to expand and if it somehow tanked, well, that probability wasn't considered much at all. And so the bubble burst and the subsequent damage is severe.

As a result the subprime programs were swept into the trash bin and that was that. For a while anyway.

A host of the subprime lenders and brokers who prospered during the boom years and then for one reason or another exited the scene are now coming back. The niche they are presently involved in is in many ways similar to the subprime one. It's the FHA, or Federal Housing Administration, product that is primarily designed to cater to first-time homebuyers, although all applicants are welcome, has reasonable income standards and requires a down payment as low as 3%. Borrowers pay FHA a fee that insures loans against default but ultimately it is the taxpayer who guarantees these mortgages.

The problem here is that these former subprime mortgage lenders, some of whose background includes bankruptcy filings, civil lawsuits, state disciplinary measures and a few criminal convictions, are using the same high-pressure sales tactics they did before to make loans. And they are supposedly sometimes involved in outright fraud just to get to the closing table. The bottom line is that the paper they write goes bad at a rate much higher than national average. In the big picture, only about 4% of all loans were FHA in the fall of 2007 and a year later, today, it has soared to 26%. And that number is likely to grow even more in the coming months and as it does more of these poorly-underwritten loans will start falling behind and ultimately face foreclose. Sounds familiar? 

To qualify to do these loans a company has to be approved by FHA. Why, then, isn't FHA weeding out the unworthy applicants? For one the agency is way understaffed to handle the surge of applications it's getting nowadays. The systems in place probably are ill-prepared to catch everything they are supposed to catch. Staff training might also need an upgrade. Perhaps pressure from who knows where unduly influences their decision making. It's possibly a little bit of all of this.

Anyway, FHA is one of the main players in the government's far-reaching plan to rescue the housing industry and to allow it to operate with minimal supervision is irresponsible, to put it mildly. It's clear that there is a power vacuum in Washington right now and from the way things are going at this point it will unnecessarily prolong the real estate market's recovery. Sadly, the word responsibility has a hollow ring to it.    



Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst - syndicated mortgage, housing and property management blog
My cell: 702-499-1006

Comment balloon 12 commentsEsko Kiuru • December 05 2008 05:10PM




Posted by Renée Donohue~Home Photography, Western Michigan Real Estate Photographer (Savvy Home Pix) over 10 years ago

Esko, without proper oversight the unscrupulous ones will try to get away with what they can.

Posted by Gary Woltal, Assoc. Broker Realtor SFR Dallas Ft. Worth (Keller Williams Realty) over 10 years ago

Ditto in the featured.  Great post!  I reblogged it for my subscribers to read also.

Posted by Randy Prothero, Hawaii REALTOR, (808) 384-5645 (eXp Realty) over 10 years ago

Esko, I will agree that some of the shady Lenders and Loan Officers that abused the subprime programs and created a lot of the mess we are in, are now trying to stretch the guidelines of FHA.  But I will disagree that they will be able to do to FHA what they did to subprime.  Even though FHA is experiencing a lot more loans then in recent years, the guidelines are much tighter then subprime.  For one the ratios are much lower, and loans has to get an Approved/Eligible through Automated Underwriting, because if it doesn't and gets even a Refer/Eligible the ratios tighten up even more.  That is just one of many areas that suprime and FHA differ greatly.  I am not going to turn this comment into a blog, so I will finish by saying that we need to be more concerned with how the con artist can manipulate the Conventional Loan Programs (Fannie Mae & Freddie Mac) than the FHA.  DE Underwriters work to hard to get that designation to risk losing it by knowingly approving a bunch of bad loans.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) over 10 years ago



Posted by Esko Kiuru over 10 years ago


Some of the questionable subprime operators are now FHA-licensed and making their moves there.

Posted by Esko Kiuru over 10 years ago


Thanks for helping to get the word out on this development.

Posted by Esko Kiuru over 10 years ago


Appreciate you expanding on the discussion. There is more detailed info on this under the link.

Posted by Esko Kiuru over 10 years ago

Shady loan officers moreso than shady lenders. Frankly, after 16 years in the mortgage industry, I switched 4 years ago and became a Realtor... now Broker.  I was embarrased when I was introduced as 'Mortgage Broker'.  I still use my years of experience to help facilitate deals. I still own a mortgage company. I will still do a mortgage for a long time customer. And, I'm looking forward to the 'A' paper stated income loans again, as most of my customer are high end self-employed with 700+ scores. FHA's no help for me.

Posted by Colleen Cooley, CRS - Jupiter Florida (The Corcoran Group) over 10 years ago

Esko: I believe the difference between FHA and subprime is the fact that FHA loans have to be documented. the unscrupulous lenders could commit fraud with FHA but it's much tougher. With subprime, a borrower could get a loan just by saying they made so much, etc. etc. With FHA, ratios exist. Thus, I believe the default rate will be much lower because borrowers will be turned down due to not fulfilling the ratio. I recently had this happen to one of my borrowers. They wouldn't approve her loan because we were using commissions that were declining. Go figure. Thanks for the post! We shall see.



Posted by Paul McFadden, Pest Control, Seattle, WA. (Paratex) over 10 years ago


Stated programs will be back once things get sorted out.

Posted by Esko Kiuru over 10 years ago


Hopefully FHA tightens its controls on these opportunistic operators.

Posted by Esko Kiuru over 10 years ago