I try to stay on top of studies and reports on the Lending Industry as much as possible. Some times those studies and reports are spot on, while others are so far off base that I wonder if they have a clue about what they are talking about.
One of those studies that in my opinion is way off base is one that I feel FHA Is Being Unfairly Criticized by New York University economics professor Andrew Caplin. In the article about Caplin's study it states:
".... the problem is the fact that most recent FHA loans have been for 98 percent of the home’s value. As those values fall on many properties, the borrowers find themselves underwater, and because FHA’s internal refinance program doesn’t necessarily require a new appraisal, those borrowers could remain underwater even after refinancing.
Since many of the FHA borrowers refinancing are underwater, it will be difficult for them to exit the FHA system by either selling the house or refinancing into a non-FHA mortgage,” the report says. “As such, these borrowers may remain at risk of default for many years""
It is a shame that there are people who are going to read the statements above, and view them as credible statements because of the position and title of the person who wrote them. But to those in the Lending Industry, the response is most likely "does this guy have a clue about what he is talking about."
First, FHA will only do a refinance up to 97.25% of LTV, and even though 98% is close, it is wrong. Second, FHA will only go to 97.25% on "No Cashout Refinances". That means that the Borrower can only refinances what they presently owe, plus Closing Costs, and nothing else. So aside from the added Closing Costs, the Borrower is in the same position before and after the refinance in relationship to the equity of the property. The refinance has only increased the amount that the Homeowner may be underwater by a very small amount. But in return the Homeowner is able to lower their monthly mortgage payment by several hundreds dollars in many cases.
The statement that Caplin makes in the second paragraph, really shows that he does not understand what he is criticizing. Caplin is referring to the new FHA Guidelines for FHA Streamline Refinances, for Homeowners who purchased a home with an FHA Mortgage, and the FHA Case Number was endorsed before June 1, 2009. Most of those Homeowners purchased their home with interest rates anywhere between 5.5% and 7%. Because property values have dropped since the time the property was purchased, the Homeowner cannot not take advantage of the lower rates of today. The new FHA Streamline changes make it possible for those Homeowners to refinance into the lower interest rates, because a new appraisal is not required. The new FHA Streamline Guidelines only allow those Homeowners to refinance the remaining balance on their Mortgage, and they CANNOT roll in the Closing Costs, so there is nothing added to their present principle balance.
Professor Caplin is therefore not only unfairly criticizing FHA for allowing these Homeowner's to refinance into a much lower monthly mortgage payment, but for also unfairly accusing FHA for further driving these Homeowner's underwater on their property. I fail to understand how a lower monthly mortgage payment is bad, and how no change in the Homeowner's principle balance is further putting them underwater?
The last sentence in the second paragraph is even more strange than the comments before it. Caplin states "these borrowers may remain at risk of default for many years". May be I am missing something, but how does lowering a Homeowners monthly mortgage payment keep them at the same risk level of default as the higher mortgage payment that they had. If anything this may be just the help that the Homeowner needs to keep them from defaulting.
FHA has done a lot of things in recent years that they deserve to be criticized for, and I have criticized them often for it, and will continue to. But the changes that FHA made to the Streamline Guidelines for Homeowners who purchased a home with an FHA Mortgage, and the FHA Case Number was endorsed before June 1, 2009, should be applauded and not criticized.
If Professor Caplin was paid for this study, he should give the money back, he clearly does not understand what he is talking about. This is one time that FHA Is Being Unfairly Criticized in my opinion.
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Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com
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