Bring Back the Old FHA - No Qualfication of Buyer

Remember when, maybe you are to young, all you needed to buy a house was enough money to pay the seller's equity. That is a lot cheaper than Uncle Sam floating everyone's boat, float is in your pocket, to let more people buy a house.

It makes more sense to let those who have it buy a house than charge me to so that they can buy a house. Who cares about credit history  if the buyer puts up 15% to 30% down. There are not many people who would walk away from that kind of money.

 Example: 

                A former client was having problems, about 1.5 years worth, with making his mortgage payments because he was in the import-export business in the early '80's. Remember 20% interest rates? His business was suffering because Letters-of-Credit in the Orient were becoming worthless, sounds like 2008.

The import-export business was originally financed with a SBA Loan, which means pledging all of your assets. The result was a default on payments to SBA. This means loss of primary residence.

When the buyer came to me to find a replacement residence, I queried him about his circumstances (means I asked questions).

How much cash savings do you have, $35,000 was the answer. He knew he was going to lose his home, and at the direction of his attorney, he put the mortgage payment in the bank. His attorney tied up the foreclosure process for 2 years.

Hey! That's great I said. All we need to do is find a seller who's asking price has $35,000 +- over the principal balance on their mortgage. I found him the required property. He closed in 2 weeks. Four years late he sold the house and had crystal clear credit.

It was part of the home investment process at that time to use cash in the bank, dirty word to a banker, or finance 80% to 97% of the purchase price. 

     What's wrong with this picture? Seller and buyer were happy, but banks thought they should get more money. Voila! FHA assumption without qualification was killed.

Shortly after we had the fiasco where Savings and Loans had to be rescued by, you guessed it, Us. To get more fees, higher and higher appraisals justified higher purchase prices. GEE, that sounds familiar. When the bubble broke many Savings and Loan went belly-up and the RTC was formed to pay for the mistakes created by the financial institutions. The cure was to make appraisers get state licenses because they must have been the reason for the increased housing values. However, the real reason for the increased appraisals was the loan officer and/or the lender needed to make their next yacht payment. Why does this sound familiar today?

As a Realtor during today's price surge, I was always amazed at what a lending institution would accept as a valid purchase price when I had sold the property only six months ago. Then realizing that value had nothing to do with it. This is why I decided to let my appraisal license expire. My valuations would always be questioned by the lender if sale price and value were dissimilar. 

The price was determined by the amount of loan fees generated. So the creation of the RTC had become a gross waste of taxpayers money. Today, appraisers are licensed. Who gets the blame now? Is it those approving 105% LTV's, 100% financing for first time buyers that have no idea what their getting into, or the Agent and/or LO creating rosey scenarios about buyer's finances. 

Instead of doubling the FHA  loan limits so that a higher unaffordable amount may be financed, assumption of existing debt without qualification would have been a less expensive alternative. If there is a default by the new buyer in less than 4 years, the seller is still liable for the old loan. Sellers are not going to sell their house without getting cash, a comfortable amount, in their pockets. Plus, the only finance charge is $50.  

This system worked, even at 20% interest rates, because real estate agents were able to match buyers and sellers based on each of their capabilities and circumstances.

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