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ever wonder why there are restrictions on FHA loans?

Housing and Urban Development Secretary Alphonso Jackson announced his resignation this past Monday. Mr. Jackson was accused by two senators from Washington (Patty Murray) and Connecticut (Christopher Dodd) of being ineffective from wrongdoing. With FHA loans making a comeback, Alphonso Jackson resignation can be a critical factor in what upcoming decision to be made in tackling the housing crisis.

With FHA Loans starting to make a comeback in today's marketplace, ever wonder why some investors/lenders put restriction of FHA loans that HUD doesn't have?

If the United States government stands behind (issues) debt, why wouldn't the rates be very low? Many investors have put more restrictive guidelines in place, and it's not new to put overlays on guidelines on loans that Fannie or Freddie will buy, or that HUD will guarantee. For example, HUD will allow manufactured housing but some investors won't. Although the government insures loans, the difference in opinion on the value comes in servicing: does the lender invest in the servicing on these loans? HUD does not insure lenders against the cost of delinquencies, foreclosures, etc., or the servicing-released premium that lenders pay.

Posted by Bernie Germani on 04/02/2008 10:58 AM

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bernie germanis blog about fha

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2 Comments on ever wonder why there are restrictions on FHA loans?

APR

2008

Here's another reason: when a claim is presented, i.e, when there is a default, the folks at HUD go over the file with a fine-toothed comb, much the same way the folks on the secondary market do when they want to enforce their repurchase agreements The people who audit these files look for any plausible reason -- even not-so-plausible reasons -- to criticize the decision to approve the loan. As a result, insurance claims get denied and in some cases Direct Endorsement underwriting status gets revoked. The whole thing is not nearly as simple and cut-and-dried as it would appear.

APR

2008

It's going to get worse, I promise. No employee is going to be the next to sign off on the next future foreclosure. I know I wouldn't.

In the short run, it's easier to avoid future foreclosures by finding problems with almost every loan. Lenders will use their time coming up with new papers to better educate, but further confuse, their borrower. About a year from now, when the reserves have dried up and the options are few, the lenders will realize that the way they make money is to earn interest from mortgages.

In order to earn more money, they will have to lend more money. It's really that simple!

If a lender wants to add restrictions and tighten their guidelines to write better paper, that's fine. Soon, perhaps VERY soon, another lender will loosen a bit in order to gain market share. As their profits soar, others will follow suit. It's a cycle - plain and simple.

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