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Blue Ink vs Red Tape a.k.a. FHA vs Subprime

I've seen so many mixed opinions over the recurring strength that FHA Lending Programs are having and gaining in the current market and oddly to me as a veteran of HUD's programs the majority of those opinions are negative!

It has always been my experience in the business that mortgage professionals are intimidated and annoyed by government lending programs and practices. With easy money lying around in the sub-prime market why would they have extra disclosures signed and deal with specific appraisals and appraisers when they could just take the file elsewhere? Well the idea that they could have made more money should have popped into their head first! While remaining at a competitive market rate the average yield on an FHA loan is far higher than you could ever earn on a sub-prime loan. (Check your rate sheets)

The chart below is statistical data as found in the Mortgage Bankers Association's Press Release dated March 6, 2008 from the National Delinquency Survey (NDS) titled "Delinquencies and Foreclosures in latest MBA National Delinquency Survey". ¹

These statistics reflect information for the last quarter 2007.

	Percent of Loans	Percent of Foreclosures Started
Prime Fixed	65%	18%
Prime ARM	15%	20%
Sub-prime Fixed	6%	12.0%
Sub-prime ARM	7%	42%
FHA & VA	7%	8%

^•1^{This information is used with express permission from Mortgage Bankers Association. To read the complete press release click here. To learn more about MBA and their services please visit them on the web at http://www.mbaa.org/}

Compare the percent of Outstanding Loans percentage for each category to the percent of Foreclosures Started for that category. As we can clearly see the Sub-prime ARM has the highest percentage for foreclosures started and the second lowest percentage of outstandings. It also shows that foreclosed government loans play only a small role in current national foreclosure levels.

Here's why:

1. FHA and VA Loans are full doc loans. No Stated Programs for first-time qualifiers. (*FHA Streamline Refinances allow for streamline documentation for existing FHA Mortgagors with acceptable payment history.)

2. There are no Pre-Payment Penalties for FHA and VA loans. This allows for conversions (refinances) to better terms should they exist without penalty to the borrower. (**Access to conversion without penalty facilitates more active borrowers which translate to more potential business. This is good for you!)

3. Rate resets for FHA and VA loans are lower than competing products. FHA raised caps from 1/5 (1 percent per year with a max increase of 5) to 2/6 when HUD Insurance Programs opened the door to more ARM products. (***Are higher CAPS actually good for the consumer with an FHA Product and does this type of change serve HUD's Housing ideology and mission? What's your opinion?)

FHA and HUD's Homeownership Ideology

I have seen posts and read blogs that admonish FHA as the "New Sub-prime" and believe that as an industry if we take advantage of FHA that we'll just be right back where we are in a few years and ultimately make things worse for ourselves in the long run. "FHA the New Sub-prime Toilet", "Throwing Gasoline on the Fire: Is There An Even Worse Subprime Disaster Around the Corner?"

Well here's the skinny. FHA was Never expected to have a low delinquency or foreclosure rate because it's designed to offer reasonable access to all borrowers, including those who might not qualify for other programs. Its purpose and design is to stimulate Homeownership and as we all should know Homeownership and all those industries involved in creating and servicing Homeownership are economic indicators.

In recent testimony FHA Commissioner Brian Montgomery stated:

"In Fiscal Year 2007," says Montgomery, "FHA provided loss mitigation support to 91,000 borrowers, 86,500 of whom then cured their defaults and stayed in their homes.

"While not every one of these borrowers will be successful in the long term, historically 89% of all borrowers who benefit from loss mitigation still have active loans two years after the assistance.

"This success is responsible in part for a reduction in both the number and percentage of FHA foreclosures, with the foreclosure rate dropping from a high of 1.74% of insured loans in FY 2004 to 1.45% in FY 2007."

So with the idea that FHA should not have low expectation in delinquency and foreclosure...Government Loans Lead the Way in Loss Mitigation and certainly have the lowest percentage of default. Something must be working right!!

Ladies and Gentleman, in the current market and in future markets (as we can historically see) your attitude toward Government Loans has to change! Educating yourself on FHA and VA programs will lead to nothing but more funded loans in your pipeline. No they aren't the easiest, but were any programs easy when you first started them, and in the current state of the economy you just shouldn't expect an easy paycheck!

Chaz Ramirez is a DE Underwriter, HUD Title II Mortgage Application Consultant, and a Trainer. For more information about me and my services please visit my ActiveRain profile.

Posted by Chaz Ramirez on 03/29/2008 11:29 AM

Comments (38)

fha, subprime, government loans, current market, economy, foreclosures, delinquencies, default statistics

Post is included in group: MortgageEducation
Post is included in group: Mortgage Brokers Unite

38 Comments on Blue Ink vs Red Tape a.k.a. FHA vs Subprime

MAR

2008

Great Post, I agree with you....FHA is not sub-prime and we have to get out of that frame of mine.!!!

Hi Chad: Great post but I have read so many different statistics regarding the FHA/VA foreclosure rate, my eyes are blurred. You can go to the HUD site and its different, you can go to the FHA foreclosure site and its entirely different. I do not believe FHA is the way for the mortgage industry, it is a direct Taxpayer bailout. When FHA raised their cap it caused more foreclosures. I do not believe the government is capable of managing anything. Look at the price of gasoline, the addition of ethanol has decreased gas mileage by 3 -5 miles per gallon. Our food prices have gone up tremendously. Government is ill equipped to manage the housing industry and they have adequately proven that to me. To design a program that "never was intended" to eliminate or reduce foreclosures says it all. We don't need another debacle down the road. We need to make certain there are enough checks and balances in the industry to drastically reduce fraud. That means each part of the transaction needs to be done by a separate entity, comingling of interests breeds fraud. What this simply means is that lenders do lending, loan officers do not sell real estate part time and Realtors do no do loans part time. No in house lender (that's just too cozy) for real estate companies, builders and certainly independent appraisers. A one stop operation should not be allowed. FHA has a place but it can't drive a "free market" economy, nor should the tax payer be in the background to clean up a government mess. Sub prime is a misnomer simply because many people with great FICO's were put in those loans for one reason - the rates were better. And there were 5,7,10 and 30 year fixed rates. So as far as I am concerned sub prime still hasn't been correctly or adequately explained, it's be maligned. Keep me informed Chad I appreciate your blog. Have a great day.

MAR

2008

I think back twenty seven years ago to the first house I sold with Va Financing. We had to wait 6 months until the rate dropped to 16.50%,so the Buyer would qualify. I also am an FHA DE Underwriter that does not do loans anymore just sell houses ,but you are 100% right. The increase in FHA/VA limits will take some of the sting away from losing so many Sub Prime Lenders. The new limits should help alot. The entire loan process should only take one week to 10 days longer than conventional loans at the most and we as realtors should feel much better for our Buyers because in two years our clients mortgage rates will not go thru the roof or they owe 125% more like the neg am loans. My father told me 8 years ago that the internet is were home buyers will find their new homes not driving around for days and weeks like my mother and I have done for 25+ years. We as realtors must embrace these government programs for what they are-Another tool to sell or buy homes for our clients.

Congratulations on your featured post. I am so thrilled that we can discuss what is to come as government loans take the spotlight. Parked, and wiating for comments, especially yours.

Great post, Chaz. FHA is going to be a big factor going forward.

For the purpose of paying down our nation debt and/or making social security solvent, why can't the FHA make loans at lower rates (3% to 4%) and use the profits accordingly?

GREAT POST!!!! I am closing on an FHA loan next month and I have learned so much about FHA vs. Conventional loans.

Thanks for all the great information.

daniel

Hi Chaz,

Interesting post. If your numbers are accurate, it looks pretty convincing to me, bringing others up to speed will help. Not a total solution, yet it can help.

Two days ago I attended an FHA financing workshop, one of the first in many years. As a REALTOR who learned FHA/VA financing in the early 70's, that was the vast majority of our transactions. The loans were nothing exotic, yet basic and straigh-forward, pretty easy for consumers to understand. As prices increased over the years they (govt. loans) became somewhat obsolete in many high cost areas. Yet now with higher loan limits coupled with lower prices it can be viable again for many.

Thanks for the info.

Chaz... the problem, which you mentioned briefly, is that so many think FHA is a fill in now. It never left and should have been stronger back around 2000 to 2005. But as you mentioned, less paper work and easier guidelines in some cases. But 2 things... I could sometimes make more on the FHA than subprime and still give the client a much lower rate.

Overall, in all honesty, I am glad that so many lenders and brokers don't want to spend the money to go FHA... with conventional mortgages having such higher credit scores and higher rates, that just means more business for those of us that can do FHA and know how FHA works.

In regards to the foreclosure numbers and such. I am not up on this as much, but it all comes down to who publishes these numbers. I agree, HUD has this on their site and there are still many FHA foreclosed homes. We can't ignore the fact that people in general just have a hard time making their payments, no matter what rate they have. It should not always blamed on the type of mortgage, but the economy. Many people are just plain hurting, no matter how you look at it.... subprime, FHA, conventional... we need to look at job losses, loss of income, families becoming larger on a lesser income, etc etc. Overall, good post. I just wrote something like this, but with a chart comparing FHA and conventional mortgages. FHA mortgages vs Conventional mortgages.... which is better?

Somewhere the definition of subprime changed. Of course FHA is subprime. But fully qualifying subprime, which is quite different than no doc subprime. If someone had a 10-20% downpayment, A+ credit, and more than enough income, they would not use FHA.

When the federal funds rate started to drop, and struck new lows in 2003, we were well into a powerful stock market recovery. The federal funds rate stayed around 1% long enough to set off a boom in low-cost mortgages and in home prices. Home buyers soon discovered that their ordinary paychecks could now buy fabulous homes. People with cash in savings learned their money earned next to nothing.

Interest rates on home mortgages dropped so fast that the National Association of Realtors' housing affordability index showed that almost anyone could buy a house somewhere in America, because borrowed money was practically free. It's no wonder that home prices soared. According to the Office of Federal Housing Enterprise Oversight, the national index of home values rose 46.9% in the five years ending Sept. 30, 2007. That's an annualized appreciation rate of 8% -- enough to make us all think owning a home was way better than the stock market. Some investors thought that they wouldn't have to actually work for a living anymore. The MBA numbers, which you posted, have mathematically equated that theory as invalid for a while now. Buying and owning a home was a cheap thrill for a few unscrupulous consumers.

On another note, I thought I may have heard somewhere that Fannie Mae was exempted from making certain disclosures associated with mortgage backed securities, including pools of subprime, during some period within the last few years. Could it be in one of their disclaimers in the MBS section of the website? How is loss mitigation taking place in that failed sector?

Joe.... I have to disagree with you strongly.... FHA is not subprime... not even close. subprime rates even a year ago were about 2% higher than FHA on low credit scores. Besides, you could get to a 95% or better LTV on subprime without having a 580 or above... and that was 1 1/2 years ago. And even if someone had 10% to 20% down, FHA may still be the better option than conventional... it all depends on your credit scores.

Chaz... sorry for semi hijacking you post, but one really needs to understand what is out there before they make statements such as the one above. Besides, you need to define A+ credit... I have seen some people with stellar credit, no lates, and credit scores that were 660. If this was the case and you were putting less than 20% down, then FHA would be better than conventional, HANDS DOWN. I have done numerous examples such as this which is living proof against statements such as Joe's. FHA mortgages vs Conventional mortgages - A True 3% down Comparison And read the one that I just wrote about today, comparing FHA against conventional with 10% down. There is a payment difference of $201 a month. OUCH.

Lastly, you couldn't get a loan above $417,000 with 5% down. You need a 680 credit score and 10% down. I could still do a FHA loan up to $688,000 with 3% down and a 580 credit score. People can't just assume and that kind of statement above ticks me off.... hence why so many loan officers are misleading the general public.

You will NOT get any argument from me.

The problem we've had in the past few years is listing agent who discourage their sellers from accepting FHA contracts and appraisals. With no government appraisals, we just can't get a reasonable appraisal.

The last FHA appraisal I had was for a $322,000 contract. We had a boatload of conventional appraisals in the community for as high as $340,000. The appraiser wrote $270,000 because that was the last government appraisal she could find. We killed the contract and wrote a conventional one.

With the new FHA limits, they aren't going to help much with FHA appraisers looking for government appraisers.

Great post. I'm completely for FHA and if I didn't have my own business with tons of deductions I would surely go that route on my refi!

GREAT post, I agree 100% The stats are really good info.

Thanks

Interesting blog and comments. I love FHA loans and will continue to recommend them to clients. I think that they are a good solid program as long as everyone understands what is required up front.

GREAT post, I agree 100% The stats are really good info.

Thanks

GREAT post, I agree 100% The stats are really good info.

Thanks

I have been hit hard by the MI companies decision March 3rd to require 20% for fico's under 620. This is the main reason why FHA is now a viable option for me. Fannie EA-Levels with MI were available. They are gone. FHA has always been a good program, but it will be better when they allow for 100% financing because it is needed badly. If our country as a whole suffers collectively on one thing it is-Lack of Savings.

FHA has been a God -send for my clients. Fha pays more attention to the payment history rather than placing their sole focus on the credit score. It is super difficult to get approved for a conventional loan. Your credit has to be impeccable. FHA is here to stay.

After beginning my real estate career on the West coast.- normal American city- where 8 out of 10 loan were FHA or VA, I became used to the tough way of doing things. However, this kept buyers and sellers in check.

After moving to a resort area, I never saw FHA for 2.5 years, and now it's beginning to surface. Now that agents are back to selling $200,000 properties and having to work versus take orders, they are up for anything- including government loans which will resurface strongly in the near future. These regulations only protect everyone -and it's a little more work, but still protects all in the end.This program allows those in need to purchase in a buyers market instead of paying an equal amount in rent. Great Programs!

I just closed on my personal home...with an FHA loan. Two extra cool benefits:

1) The interest rate was lower than conventional 30 year rates.

2) The loan is assumable. If rates go up, I can sell my house for more!

Thanks for the well-written post. I agree. Agents should take another long,hard look at FHA loans. The pros can outweigh the cons.

Great food for thought Chad. I was sorry to see FHA all but disappear when sub prime came along. People had to actually qualify for that FHA loan.

Thank you very much for the great post. You explained very clearly between FHA & conventional loan with stats.

MAR

2008

Fha loans seem much more difficult than conventional loans, but that could be because I have never seen one go smooth. Their requirements are tough, especially on bank owned homes which is the field I specialize in

Great post and congratulations on the feature. I don't think I've seen your name before. I am about to go check it out. Again, congrats. And it's very true. The amount of defaults are low. I think they need to reemerge on top.

We have steered most our first time home buyers to FHA since mid last year. Rates are great and even with the prepaid mortgage insurance it makes sense for the buyer longer term. Also, there are down-payment assistance programs with FHA which allowing the buyer to go for 100% financing.

Our mortgage banker is not complaining either. I guess making around 2 points on each deal (while still providing sub 6% rates) is well worth the effort:).

Ivan Tchakarov

Ages ago we worked with a lot of FHA loans, but it has been only recently that we have seen them resurface as something buyers are wanting.

Wow! I want to start with saying how honored I am of the interest in my post and to be a Featured Post within less than 2 weeks of participation with AR! I particularly want to thank Janet Guilbault the writer of the referenced post "Throwing Gasoline on the Fire: Is There An Even Worse Subprime Disaster Around the Corner?" who inspired this post. Thanks Janet! And now without this becoming too much like a rewards ceremony...responses!

D. - Glad I can be your Jazz! Thanks for the comment.

Patti - Response reserved for need of space. See below

Ebe - Thank you for the comment and your father was right the times and trends have changed. Look at how we market ourselves now. I do want to say however that in my professional world, I make sure that FHA and VA loans turn over just as quickly as conventional. It almost always does take longer for most people but it shouldn't!!!

Janet - Oddly, though I am in Atlanta, the majority of the work I do is on the west coast (I live in the Bay Area through "Association" if you will) and I know what those numbers and prices look like out there. Fortunately now there will be a larger open market for FHA loans with the loan limit increases. However, even if you never use it at home it's great to know these programs and their effects on our industry! Thanks for all your great insight!

Peter - Thanks for the comment. FHA is going to be a big player going forward but let's not forget the history and the impact it's already had on us. Look for my future post "The FHA Today". (After month end madness).

Stephen Graham - Everyone Steven makes a GREAT POINT! This is the kind of Questions we should be pushing to the bureaucracy in these times! My complete response will be below AND you'll also want to check out my future post, "The FHA Today".

Daniel - Congrats on the closing and furthermore congrats on learning about the products!

Lynda - Thanks for the comment and kudos for being out there and continuing to be educated and re-educated in a changing world. FHA definately is the 70's anymore. Watch for my future post, "The FHA Today". You'll probably take a good walk down memory lane with me on this one.

Jeff - Thank you for the comment. I'm a fan of your posts! You are right that so many people think that FHA is a fill in. We have to remember that this is a business full of rookies who haven't been around long enough to now anything but the refi boom.

Two responses:

1. HEY! I make a living on HUD Title II Approvals...we need those wet behind the ears brokers to call me! LOL!

2. As we may be aware the Mortgage Bankers Association has the highest level of influence on policy and policy makers in regards to our industry. I use their data (and all the reports collect their data through different polling techniques) because it's the data that the government will review first. Foreclosures are going to happen for 1 reason or another but let's remember that their is business in Foreclosure too! REO, Title, Re-Sale. It's not Armageddon. We have to keep our eyes on the economy as a whole. Not just one peice of it!

Joe - I'm with Jeff and have to offer a corrective thought. FHA is not sub-prime. Three types of programs: Conforming which includes conventional and Alt-A, Government which includes FHA and VA, and Sub-prime which includes Alt-A, sub-prime, sub-sub-prime, sub-sub-sub-prime, and sub-we'll just make something up that earns us a commission-prime. Check with your lenders. How many sub-prime lenders out their offer FHA/VA programs? Fewer than you think. And it's my opinion that all three programs will continue to live on. Sub-prime's not gone. It's just like flushing the toilet...the water goes Somewhere but eventually comes back! And I have converted Many conventional loans to FHA due to increased salability through assumability and if there's MI to be had in a large number of cases FHA is cheaper. But you are right that this won't always work! Thanks for the comments!

David - You make some excellent points. Let's think about that time when the fed rate started to fall and housing starts skyrocketed. What was the true result of the industry spike? People spent their so called "non-performing" savingson housing down-payments because money was as you said virtually FREE. Then what?? No liquidity in the credit or housing markets. Hmmmm...seems rather reciprocal to me!

The problem? Spoiled consumers. Ourselves not excluded. It's hard to say no to free anything. Especially money. But what should we expect to happen to the rest of our financial picture in turn?

Well if you demand less than 6% as the cost of money for the largest chunk of wealth you have. Don't ask for a huge return on your 401k! Ladies and gentleman the economy doesn't work that way!

If we spend less on our largest investments our smaller ones certainly don't get bigger. Think of the economy as a revolving door. Performance in one sector certianly impacts the rest. This is why it is of the utmost importance that we as members and performing professionals of an industry that is an economic indicator be aware of US Monetary Policy and the economy. We have to be aware that what we do and how well we do it affects every one, every where, every day!

If you take advantage of someone to get a better check...don't say a thing when you get to the gas pump or the grocery store the next day!

The starts failed because we spent more money than we had and it wasn't Sustainable! Watch for a future post on Sustainable Living!!

Now I'll step off my soap box. Thanks again for thinking in Real Terms and bringing up Real Questions Dave!

I'll get back to you on Loss Mitigation in the conventional market. Not my forte or area of expertise but I'm sure I can get the numbers!

Jeff - Semi-hijack all you want! That's why we are here. The exchange of knowledge!

Lenn - What you wrote preterbs me. Greatly! I'm not sure how in any world and in any case an appraiser who is FHA Approved made a statement to you directly or through your mortgage professional that there needed to be any relative existing in government appraisals.

Someone fed you a full BBQ size platter of BS! I HATE IT and I'm so sorry.

Everyone please read: Appraisals are FEDERALLY REGULATED. Federally. Not locally. USPAP (Uniform Standars of Professional Appraisal Practice) The Appraisal Foundation is Authorized by Congress as the Source of Appraisal Standards and Appraiser Qualifications.

USPAP does not define Market Value but they do qualify Fair Market Value which is defined by law and accounting as: The price a willing buyer would pay to a willing seller in a FREE MARKET aka FAIR MARKET.

If you would buy the house next door with conforming money for $340,000. You'd better beleive that HUD's Ideology will demand that same price for FHA money. Prior appraisals have NO influence, none what-so-ever on current market. Don't let anyone tell you that!

If as an underwriter I caught this practice in a file on my desk...I'd honestly pursue having the appraiser disbarred from FHA transactions.

BUT going back to your scenario experience and my gut tell me that the broker fed you the line because the purchase amount was too high for FHA Loan Limits and as opposed to accepting accountability for it...he pointed the finger at the next best victim which was the appraiser.

This shouldn't be happening. I'm sorry again and I hope it didn't ruin you on the idea of FHA loans.

Cree, Richard, and Bill - Thanks for the comments. Best of luck to you!

Julie - Thank you for the comment. Please see my comment to David Saks for my thoughts on savings and 100% financing for FHA.

Aja - You're preaching to the choir here! Love to hear it. Keep it up!

Wendy - Excellent points!

Tony - Exactly what I'm talking about!

Wayne - That whole giving money away without question thing never really settled with me. I wouldn't lend my money to my mother without knowing she could pay it back. Would anyone besides sub-prime lenders? Thanks for the comment!

Ryan - The only thing really different about an FHA Loan is the stacking order. Honestly. See my blog: FHA's Mortgage Credit Analysis and what it means to You! for some helpful insight. The more you know about them the easier it will become. Promise!

Christy - Thanks for the comment. I'm a newbie. Only been with AR for 10 days. Make sure you subscribe so you can be up to date with future posts!

Ivan - Smart way to make some money without ripping someone off huh? Keep it up!

Bob and Caroline - Some of us give our age away by talking about the olden days. Good to see that there are people out there who have been in the business long enough to remember! Best of luck and thanks for the comment!

Chaz: I am so glad to have found you right at a time when I need desparately the expertise you have. Please continue to churn out these amazing posts that are so full of meat. Although I have been officially trained in FHA, you have really helped me to understand things it might have taken me years to discover on my own. I have read all of your posts, and will need to re-read them to absorb and practice your suggestions.

Every once in a while you find a gem in the Rain. Please forgive me if I occasionaly suggest topics as I struggle through with all of the other Bay Area mortgage brokers who are waking up and smelling the FHA coffee.

You are wonderful, Atlanta Chaz!

MAR

2008

Chaz, my comment is a no-brainer, and thank you for high-lighting it.

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