Good News for Workout Experts, Bad News for Uncle Sam
Workout specialists and scratch-and-dent servicing artists start your engines. Uncle Sam is about to deliver an early Christmas present. It's called the "zero downpayment" mortgage which means if the loan goes south, the Federal Housing Administration (Uncle Sam) will pick up the tab. Is this a great country or what?
But before my comments get even more sarcastic, let me just say that I'm 100% in favor of the "American Dream of homeownership." My wife and I are homeowners, so were our parents and grandparents. We expect our daughters one day will be homeowners, too. Plenty of my forebears back in Italy were homeowners, too, except for my great grandfather, but he was a thief (eventually he reformed) and a stowaway, but that's a story for a different column, one on immigration and mortgages.
Yes, homeownership is great for the country, great for the mortgage industry, and a major building block of stable, healthy communities. But HUD's decision to offer a zero down mortgage - where Uncle Sam picks up the tab - is a bad idea.
Here's why: the delinquency rate on FHA loans is at an astronomical 12.54%. The VA rate is 8.03%. The foreclosure rate on FHA loans is 2.80%. What's the delinquency rate on conventional ("A" paper) loans? Answer: 2.54% - that's right, a full 10 percentage points lower. (These figures are courtesy of the Mortgage Bankers Association.)
So, why then is Uncle Sam (courtesy of HUD and FHA) floating the idea of a zero down FHA loan? Can you spell P-O-L-I-T-I-C-S? The White House mentions the zero down loan in its new fiscal 2005 budget. It also notes that an additional 150,000 homebuyers would qualify for the loan in the first year.
Maybe, it's really part of President Bush's plan to increase employment. After all, at least 12% of those 150,000 loans will go delinquent, which means more work for folks who make their living off of bad loans. The more bad loans there are, the more full-time workers we'll need. Ya gotta love it. This is what some folks call a "win-win."
The Mortgage Bankers Association, of course, likes the idea of a zero down FHA loan. I mean, why not? If a loan goes bad, the government picks up the tab. What's there not to love?
Don't get me wrong, I'm all for FHA and VA insurance, but before the government and the mortgage industry get behind a zero down loan, they need to fix the problems over at FHA.
What problems, you ask? According to a somewhat recent independent audit conducted by KPMG LLP, claims paid by the FHA soared by 42% last year to $7.8 billion.
The KPMG audit pins some of the blame on the loosening of underwriting standards. "We recognize that economic factors such as home purchase price appreciation and increased unemployment rates have an impact on the default rate. However, changes in underwriting policies may also contribute to the higher default rates."
Does a zero down option represent a "loosening of underwriting" standards? I think so. Either that, or maybe I haven't yet drank the "spend-thrift Kool-Aid" that the Bush White House has swallowed. As Dick Cheney told former Treasury secretary Paul O'Neill: Ronald Reagan taught us that deficits don't matter. I guess FHA claim payments don't matter either.
Maybe I'm too old fashioned. I guess I believe that homebuyers should at least put something down when they buy a house. Zero down is not something. It's hot air.
Again, I wouldn't feel this way if it were not for the 12% delinquency rate on FHA loans - that at the out-of-control claims payments. Before the White House and FHA move ahead with a zero down mortgage, they need to fix the current mess. And now.
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