While I was reading blogs this morning, I have been pondering the sub-prime market and FHA. I personally have never done an FHA loan because I do not have access to it at my brokerage. My brokers have not had the desire or assets to become FHA approved, as far as I can tell, it is a long drawn out process. Hopefully with FHA deregulation that may change soon.
I thought to myself how many people would have been able to qualify for FHA if I had had that product available to me versus those I obtained a sub-prime loan for, and would it have really mattered? The FHA deregulation is in the process of passing through the House and Senate, if the measure is approved, brokerages throughout the country will be able to become FHA approved more easily than ever before. If this would have been done sooner, would as many people be facing foreclosure? On the surface, you would think no, more people would be able to afford their housing payments, it would be a fixed payment, and everything would be "hunky dory." However, according to recent statistics, the default rate on FHA loans was nearly 1% HIGHER than that of sub-prime loans, and who takes the hit when those FHA loans default? The taxpayers do! These high risk borrowers are high risk for a reason, they do not pay their bills, it would not matter if their payment was $25 I doubt it would get paid. Case in point, In November, I had the opportunity to do a refinance for a previous client. They had terrible credit originally, and were placed in a sub-prime 2/28 ARM as a band-aid to heal their bad credit. Fast forward two years, and low and behold, when we tried to do their refinance they are currently 60 days late on their 5.75% loan. Their home had appreciated greatly in the last two years, and they were at 50% LTV, so refinancing them was quite easy. However, they are now in another 2/28 ARM. This time at 9.75% interest only. The borrowers made close to $8000 a month salaried and the mortgage payment before the refinance was $700 and $1300 after. Do I think they learned their lesson? No!
Bottom line, people who don't pay their bills, don't pay their bills. It wouldn't matter FHA, sub-prime; it's all the same. Lenders knew the risk. They accepted it. No one should be to blame but the borrowers themselves. They may have had the best intentions, but deep inside I believe they knew they would never pay their mortgage.
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