The future cost of the American Recovery

Mortgage and Lending with

The "American Recovery and Reinvestment Act of 2009," passed the House on February 13, 2009.  The bill included provisions mainly for FHA, Fannie Mae and Freddie Mac Loan programs targeted to first time homebuyers and homeowners in distress.

One of the main points of interest on the stimulus bill approved by the House is the $8,000 tax credit that would be available to first-time home buyers combined with the expanded loan limit provisions for FHA loan programs.

As per the Wall Street Journal, in January 2009 the median home price dropped 14.8% to $170,300 from the year-earlier level and about 45% of total existing-home sales involved sales of distressed property, including foreclosures.

Furthermore, FHA openly states into their web site that more American families will be eligible this year to purchase or refinance their homes using affordable, FHA-insured mortgages thanks to the economic stimulus package.

Please do not take me wrong, I am very happy to see how the American dream of owing a home can be accomplished by everyone who decently works and can proof his income, but still at which cost for our future generations? Haven't we learned yet our lesson with the Sub-Prime meltdown?

Did you know that FHA will allow a buyer to purchase a home by putting down only 3.5% of the purchase price and allowing the seller to cover closing costs up to 6%, not mentioning that there is no pre-requisite for the buyer to have at least 2 months of reserves into his bank account?

I have not yet seen any formal stats for FHA fundings for year 2008, but it doesn't take  too much time to compute the following question : How many homes funded with an FHA loan program ( Insured by the Government - read Tax Payers ) putting down only 3.5% will drop its value at least 10% within the next 12 months ?

Furthermore, did you know that a good percentage of people who's mortgages have been renegotiated etc. to lower rates with an FHA refinancing loan program will end up defaulting a few months after because they fundamentally cannot afford the homes they are in.

FHA is a honorable Loan Program that should be properly used as a lifesaver for people that legitimately could be saved from drowning or for people with their heads still solidly above water. FHA SHOULD NOT BE THE REPLACEMENT OF THE SUB PRIME MARKET.

I am all for FHA and I still support the 3.5% minimum down payment benefit as long it is responsibly granted to buyers and properties that will not hurt our economy even more down the road.

For instance, how about this guidelines :
If you qualify for an FHA loan you could benefit from the 3.5% down payment benefit if and only if :

A) You are a First Time Home Buyer and you are buying a Bank Owned property  as long the same is funded by the same bank who is listing the property ( thus helping to reduce inventory and replace foreclosures for new loans )

B ) You wont sell the property within the next 5 years . If you do so, then you will have to pay a X% from the loan amount as a pre-payment penalty.

C ) Open for discussion - What do you think ????

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