Will the Government Change FHA to Help?

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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

What resource do SMART home buyers use?... Mortgage Calculator Bank.com

Comments (7)

Ken Stampe
iBrandPlan.com - Grow your e-Profile & Brand - Dallas, TX
For the full text of Senator Dodd's letter click here
Aug 27, 2007 03:51 AM
Sean Allen
International Financing Solutions - Fort Myers, FL
International Financing Solutions

Good Points

Sean Allen

Aug 27, 2007 04:01 AM
Kate Bourland
Marketing with Kate - Redding, CA
Onlilne Marketing Mobile Marketing

I don't think that the point of Senator Dodd's comments are to offer FHA insurance for what is already a bad situation.  As I understand it,  FHA is working to create systems and programs that will allow these borrowers to refinance their way into safer products.  The homeowner would have to go through a FHA underwriting process and not everyone would qualify.

That's a win/win.  Blindly insuring mortgages that have already been originated makes no sense.


Aug 27, 2007 06:15 AM
Ken Stampe
iBrandPlan.com - Grow your e-Profile & Brand - Dallas, TX
What he is saying Kate, is that FHA should consider changing their current guidelines to allow homeowner's who are currently past due on their mortgage to qualify for a refinance on a new FHA loan. So while it's true they are proposing insuring a currently past due loan, they are considering allowing a currently past-due homeowner to qualify for a new FHA loan. To me, that's practically the same thing. If the customer could qualify for a FHA loan today, that's great. Changing FHA guidelines just to "help out" a homeowner who is past due is what Mr. Dodd is pushing for based on a characterization that those past-due homeowner's are in that position 100% as a result of the originating lender.
Aug 27, 2007 06:28 AM
David Windschitl
Cherry Creek Mortgage - Chanhassen, MN
While I do not have a ton of experience in dealing with folks complaining about their lender putting them in an uncomfortable position, thankfully.  It is my opinion and my opinion only, that folks, that put themselves in these positions tend to blame others for their misfortunes.  With that being said I think the real problem will be with people who have lost value in their home (it doesn't take much) and got in on a zero down, interest only loan.  I don't think there will be any bailout govt. or private for these folks.  Nothing but waiting for the market to rebound for these folks.
Aug 27, 2007 03:14 PM
Linda Box Taylor
Castle Connections Realty - Plano, TX
Your Plano, TX Realtor
Ken, I agree with you that this is a difficult situation because it is hard to know if it was the lender's fault or the homeowner's decision to overextend themselves.  But if you listen to the news, it is all the lender's fault, never the homeowner.  And we all know, homeowners are also at fault.
Aug 27, 2007 04:42 PM
Tony Gallegos
Cognicorp Mortgage Banking Advisory - Marietta, GA
Ken- enjoyed your post and I think we are all awaiting the passage of FHA reform. I'm going to be posting about this over the next few weeks. Keep up the good work and lets work hard at getting many of the subprime homeowners in good FHA loans.
Aug 30, 2007 03:41 PM

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