Lawmakers continue to push the current administration to find more ways to help out homeowners facing foreclosure. Debate continues regarding the foreclosure rate as to the responsibility of government to step in and aid home owners who took out sub-prime adjustable rate loans. While not consistently divided among party lines, a majority of Republicans in congress feel personal accountability on the part of consumers is key and government's role is not to "bail out" consumers who made poor choices. Whereas democrats continue to avow that consumers didn't understand their choices and were victims of a mortgage industry pushing adjustable rate programs on unaware and under-informed homebuyers.
The latest push by Senator Chris Dodd (D-CT) who is Chairman of the Senate Committee on Banking, Housing and Urban Affairs was made in a letter sent August 23rd to Treasure Secretary Henry Paulson and Alphonso Jackson the HUD Secretary. In it, Dodd urges them to allow FHA to insure home loans for people currently facing foreclosure.
"Many of these families have been victimized by ‘bad lending practices', and every effort must be made to ensure that these abusive mortgages do not result in needless foreclosures," Dodd wrote in his letter. "In addition to [FHA programs] being an engine for creating new homeowners, the program could play a very important role in saving from foreclosure American homeowners who have been taken advantage of by unscrupulous subprime lenders and brokers".
The issue at hand is changing FHA insuring guidelines to provide for FHA loans to be originated refinancing homeowners who are currently past due on their mortgage. By providing, in effect, a new sub-prime mortgage with federal government insurance guaranteeing lenders against the default of the loan.
While anyone with sensitivity can agree with Senator Dodd's desire to help people who have been "abused" by an "unscrupulous lender", the trouble with this solution is obvious.
1) Subprime delinquencies by lending to people with an inability to pay their credit obligations on time is the PRIMARY reason for the subprime market disintegrating.
Using government funds to insure loans that the REALITY turned out to be that the consumer either wasn't creditworthy or bought too much home or both seems an unsound way to use the FHA insurance fund.
2) How can you define whether a consumer was "victimized" by a lender or given full disclosure of their options, chose a bad loan for their circumstances? Who gets to make the determination as to whether we are helping Americans who were abused or enabling Americans to avoid the consequences of their choices?
It remains to be seen whether this type of change will come about. I for one am contacting my Senator asking her to speak sensibly about pushing the FHA modernization legislation but not to supplant those efforts with ideas of radically changing FHA guidelines as a "stop-gap" measure.
©2007 Ken Stampe
Ken Stampe is a Mortgage Loan Originator, Mortgage Author and Mortgage Loan Officer Instructor living in Dallas, TX. Ken provided his first client a mortgage loan in 1996 and writes about home buying and mortgages to help clients make smart home mortgage loan decisions. Contact by email at Ken@KenStampe.com
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