Loan Modification

IS The FHA Mortgage Program Doomed?

By Peter G. Miller

There are a lot of suggestions that the FHA program is on the cusp of failure, including the latest thoughts from Forbes Magazine:

“It’s not hard to imagine,” says Forbes, “how the FHA’s finances could deteriorate. The recently extended first-time home buyer credit gives buyers a subsidy of 10% of the home’s purchase price, up to $8,000, in the form of a refundable credit (meaning people too poor to pay income taxes get a check from the government). The FHA allows buyers to put down as little as 3.5%. The difference could be more than enough to cover closing costs, says Garth Rieman, a director at the National Council of State Housing Agencies. In short, the government will pay a family money to move out of a rental and into a home.” (See: FHA: The Feds’ Next Housing Debacle, March 15, 2010)

This is a really good example of something which is true in a small number of cases and grossly untrue in most.

Reality

It is true that the government is providing an $8,000 credit to first-time homebuyers — but the credit is available to ALL first-time homebuyers, not just those who purchase with FHA mortgage financing. In theory, someone who buys a $160,000 home with 5 percent down could also have their downpayment entirely covered by an adance against the first-time tax-credit.

Logically, if the tax credit is a problem for FHA mortgage borrowers then why not all qualifying homebuyers?

The tax credit is cash that the government sends to homebuyers AFTER they have made a purchase, so the money is NOT available for a down payment unless the borrower can get an advance against the money which Uncle Sam will send.

It’s also true that buyers can use the $8,000 toward their FHA mortgage downpayment — but ONLY if they can get an advance from a state agency or nonprofit organization. An advance against the first-time homebuyer credit from a private lender to pay the downpayment is not allowed.

Of course, most state housing agencies do NOT provide advances against first-time homebuyer tax credits because, well, the agencies don’t have a lot of money. To have more money they would need more tax dollars and Forbes is against more taxes. Non-profit organizations, of course, are also not generally in the business of making loans to homebuyers, first-time or otherwise.

6 Percent Reserve

Forbes also says that “the FHA has a $45 billion cushion to cover $757 billion in home-loan guarantees.” That’s a 6 percent reserve. That’s a nice big reserve in tough times.

Some believe that the mere existence of the FHA mortgage insurance program is an affront to capitalism because the same insurance can be provided — and is provided — by companies in the private sector. But obviously private sector mortgage insurance companies are also having their problems, reason enough think that the marketplace is big enough to need mortgage insurance from both sectors.

Besides, imagine how wonderful the housing market would be if FHA mortgage insurance was unavailable. Think about the number of homes that would be unsold because there was no financing. Then you’d hear howls and screams about the need for more government help.

Full post as published by FHA Mortgage Guide on March 03, 2010 (boomark / email).