(Columnist Steve Chapman recently wrote an article, regarding the efficacy of FHA lending guidelines, which is published on Townhall.com. This blog entry was written in response to the column.)
While Steve Chapman is right to be concerned about mortgage lending policies, I think he's looking in the wrong place. In reality, FHA has become MORE stringent in their lending policies than before.
Let's take a little look at history: Previous to and during the housing boom, FHA required only a 3% down payment, and their underwriting (approval) guidelines were quite reasonable. FHA for many years was the most common loan made for first-time home buyers. Now FHA requires a 3.5% down payment, and the underwriting guidelines have become more strict. Is this a step in the wrong direction? No. Has FHA become insolvent? No. So, what is the problem - or what changed?
In reality, the Conventional lending guidelines - those directed by Fannie (FNMA) & Freddie (FHLMC) - are those which spiraled out of control per political meddling and financial market fraud by both buyers and investors.
Prior to the advent of the Clinton Administration, Conventional lending guidelines required a MINIMUM 5% (though typically 10-20%) down payment. With the politicization of Fannie & Freddie under the likes of Barney Frank, Chris Dodd & the Clinton administration, the guidelines were greatly relaxed to the point that anyone with a a pulse and 0% down payment could purchase a home. Suddenly, people who previously couldn't qualify to purchase a TV on credit could now purchase a home without any problem. Add to the mix the fraud-friendly no-income-qualifying lending guidelines and you now have a recipe for financial disaster.
Now as for the present policies of FHA, other than being a little more strict than they were during the pre-boom years (and they never changed during the boom years), they're essentially as they were in the first place. FHA is still filling the role that it had pre-boom: offering a reasonable alternative to conventional loans.
Conventional guidelines are again requiring a MINIMUM of 5% (typically 10% - 20%) down payment - which is where they were during the pre-boom years. Now that mortgage investors can no longer plan to pass the default bill on to the taxpayers, they are becoming more responsible with their lending guidelines once again.
In the end, it would seem the best thing to do would be to keep the meddling politicians & fraud-mongers out of the industry all together.
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