Many people agree that the problems we are seeing in the real estate market today were mostly caused by overly aggressive sub-prime lending. The banks and private sector lenders have been given a “get out of jail free” card thanks to President Obama’s huge bailout packages. The banks, people say, are simply “too big to fail.” Well, shouldn’t we consider the government “too big to fail?” Shouldn”t we do our very best to protect taxpayers’ money by not investing in something so close to sub-prime mortgages it’s scary? By not investing heavily in something the private sector wouldn’t touch with a ten-foot pole? For those of you who don’t know, it’s called FHA loans and we may be getting in way over our heads.
Federal Housing Administration mortgages, also known as FHA Loans, are flooding the marketplace. The FHA lost significant ground during the past several years when private sector sub-prime mortgages became popular and dangerously unregulated. In fact, FHA-insured mortgages had an 11 percent share of the American home market as recently as 1995, but that number plunged to 4.3 percent in 2003, and 3.3 percent in 2004. The main reason was that the booming sub-prime market targeted FHA’s traditional core of customers – first-time home buyers with minimal down-payment and unimpressive credit-scores. The sub-prime market also offered fewer hassles and faster approval than FHA. Sub-prime lenders accounted for one-fourth of the mortgage market in 2004.
Compare that to Freddic Mac’s estimates that FHA loans accounted for 19.5 percent of the market in 2008, and projects an increase to 28.2 percent in 2009. The government seems to be taking a lot of risk with what the free market considers “under qualified” buyers. The private sector has learned its lesson….will our government?
That said, FHA loans are different than many of the sub-prime projects sold to buyers over the past few years. FHA offers “Hybrid” five-year adjustable rate programs with 2 percent annual rate-increase limits and 6 percent live-of-the-loan limits. So, a borrower’s rate will not skyrocket from 4 percent to 12 percent in one year, which was one of the practical death sentences issued by many sub-prime loans. Also, FHA has no pre-payment fees, and borrowers who fall behind on their loan have the piece of mind that FHA-approved mortgage lenders will bend over backward to help them stay in their home….including modifying the basic terms of the loan.
It is scary to think that by 2009, almost 30 percent of home buyers will still be purchasing homes with less than 5 percent down and with flimsy credit scores. If they can’t pay their loans back, it will very quickly become a national crisis.