The financial system has taken it to the chin repeatedly over the last few years thanks to multiple factors, one of which was the subprime home loan product. Many eager borrowers were able to secure funding for a home purchase using its flexible underwriting criteria although many really didn't have the means to keep making payments in the long term. The loans were structured with the idea that the real estate market would continue to expand and if it somehow tanked, well, that probability wasn't considered much at all. And so the bubble burst and the subsequent damage is severe.

As a result the subprime programs were swept into the trash bin and that was that. For a while anyway.

A host of the subprime lenders and brokers who prospered during the boom years and then for one reason or another exited the scene are now coming back. The niche they are presently involved in is in many ways similar to the subprime one. It's the FHA, or Federal Housing Administration, product that is primarily designed to cater to first-time homebuyers, although all applicants are welcome, has reasonable income standards and requires a down payment as low as 3%. Borrowers pay FHA a fee that insures loans against default but ultimately it is the taxpayer who guarantees these mortgages.

The problem here is that these former subprime mortgage lenders, some of whose background includes bankruptcy filings, civil lawsuits, state disciplinary measures and a few criminal convictions, are using the same high-pressure sales tactics they did before to make loans. And they are supposedly sometimes involved in outright fraud just to get to the closing table. The bottom line is that the paper they write goes bad at a rate much higher than national average. In the big picture, only about 4% of all loans were FHA in the fall of 2007 and a year later, today, it has soared to 26%. And that number is likely to grow even more in the coming months and as it does more of these poorly-underwritten loans will start falling behind and ultimately face foreclose. Sounds familiar? 

To qualify to do these loans a company has to be approved by FHA. Why, then, isn't FHA weeding out the unworthy applicants? For one the agency is way understaffed to handle the surge of applications it's getting nowadays. The systems in place probably are ill-prepared to catch everything they are supposed to catch. Staff training might also need an upgrade. Perhaps pressure from who knows where unduly influences their decision making. It's possibly a little bit of all of this.

Anyway, FHA is one of the main players in the government's far-reaching plan to rescue the housing industry and to allow it to operate with minimal supervision is irresponsible, to put it mildly. It's clear that there is a power vacuum in Washington right now and from the way things are going at this point it will unnecessarily prolong the real estate market's recovery. Sadly, the word responsibility has a hollow ring to it.