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Oh Alphonso! FHA Modern is so Subprime!
April 15, 2007: Hold on to your hats girls. HUD Secretary Alphonso Jackson is asking Congress to pass a proposal for a "modernization" of FHA mortgage loan programs. Pause for acronym info: HUD equals U.S. Department of Housing and Urban Development. FHA is the Federal Housing Administration. A sub-agency of HUD. Pause for palindrome info: HUD spelled backwards is DUH. Waste and fraud are HUD's long suit. Like other HUD heads Alphonso Jackson wears it well. But according to Alphonso, the FHA needs letting out in order to cover the subprime mortgage slump.

The FHA doesn't make mortgage loans: it insures ones made by FHA approved lenders. Ostensibly, FHA loans go to low or moderate income borrowers and those with insufficient or poor credit. When FHA mortgages fail, taxpayers cover the loss. When cushioned from loss many lenders get giddy. Underwriting standards limbo low. Borrowers seeking affordable homeownership obtain homes they can't afford. Rings of real estate crooks perp mega frauds. Foreclosures climb. If this sounds oh so subprime there's a reason: the FHA was once the main path to subprime style home financing. In 1999, the FHA's market share of mortgage financing was 14.6 percent. By 2006, 3.8 percent. The rise of free market subprime left the FHA eating dust.

Lenders who do subprime free market style, are cushioned by the financial institutions and investors who buy and sell mortgage backed securities (MBS). Subprime MBS are high profit and high risk. Until yesterday, the risk was obscured by a housing market seemingly set on eternal overdrive. Goodbye to all that. "Nothing is written" means real estate too. As the inexorable reverses, some are stunned by subprime reality. Those familiar with the history of HUD say hello old sock.

In March, 2001, former HUD Inspector General Susan Gaffney testified to the House Subcommittee on Housing and Community Opportunity. Saying fraudulent property flips were becoming a major problem in inner city neighborhoods and expressing concern for the future of the FHA's insurance fund. Later that year, Senator Susan M. Collins of Maine, as Chair of the United State Senate Permanent Subcommittee on Investigations, characterized the federal government as having "essentially subsidized" much of the mortgage fraud in the nation's cities. Her words can be found in the 09/25/01 Committee on Governmental Affairs document Property Flipping: HUD's Failure to Curb Mortgage Fraud.

Given the taxpayer tab, you'd think HUD would have been glad when free market subprime came on like gangbusters. Instead the FHA showed more skin. An example? Downpayment assistance programs. Aka DAPS. FHA mortgages require 3 percent downpayments. But non- profit groups can supply buyers with the money. Non-profits often mask sellers. DAP gifts get rolled back into mortgages, which wind up larger than properties are worth. DAP jacked loans aren't predatory tho. They're just painted that way by people living in neighborhoods devastated by DAP foreclosures.

Despite HUD's best efforts, borrowers continued to be "lured into accepting high-cost exotic loans"* offered by free market subprimers. Taking on "risky mortgages" rather than FHA ones. Yet not all was uneven steven. By the fourth quarter of 2006 delinquency rates for both subprime and FHA loans were rising. And in March 2007, a Mortgage Bankers Association survey found FHA rates had set a new record. Climbing to 13.5 percent. Take that you exotic bitches!

As subprime sinks beneath EZ money excess, many pols want a federal bailout of borrowers facing foreclosure. (Though lenders, banks and investment firms would also benefit not everything is about them.) Also in need of rescue: The American Dream Of Home Ownership. Which is where FHA modernization comes in. For roughly a year, the Bush administration has been pushing legislation re FHA Modern with little result. Along came subprime, giving the issue a new gloss. On March 29th, House Finance Committee Chairman Barney Frank reintroduced the modernization measure to the House of Representatives. Among other things, FHA Modern would lift FHA loan limits. According to Alphonso Jackson, raising loan limits would give "hard-working families" in high cost real estate markets "a strong alternative to risky mortgages". Only slugs hostile to hard-working families would suggest that if HUD didn't prop up high cost markets, prices might drop. And that encouraging low and middle income families to take on high cost real estate is doing them no favor.

Also on the FHA Modern agenda: ditching the 3 percent downpayment requirement. Apparently dodgy non-profits can't supply enough DAP. Though toxic subprime mortgages often require no downpayments, the FHA plan includes ways for bad loans to be tweaked into goodness via taxpayer forbearance. And borrowers who still crapped out could deed their homes back to lenders sans foreclosure process. Making subprime style homeownership even more like renting. Plus, FHA mortgages would cover more manufactured housing and condos. The most ephemeral and iffy real estate. The list goes on. With bennies like these, can anyone doubt The American Dream of you-know-what belongs on the HUD reservation?

Dang. There's always a naysayer. Kenneth Donohue, HUD's current inspector general and a former Resolution Trust investigator, believes FHA Modern is open to the same frauds as subprime. Since "the FHA only reviews 6 or 7 percent of its loan portfolios a year" and the modernization plan would "do little to assure adequate oversight of lenders, appraisers and lawyers."** In reply, the FHA put its thumb in Donohue's eye. Saying "we respect the IG's right to have an opinion". Meanwhile, Alphonso Jackson is working the stump. Hoping to push FHA Modern over the hump.

Carola Von Hoffmannstahl-Solomonoff

Sources include but are not limited to:

HUD proposes Modernization of Federal Housing Administration, News Release, 04/05/07

Stop the Subprime Bailout, Patrick.net

*"HUD secretary urges FHA modernization," Inman News, 04/10/07

**"U.S. Plan for Subprime Loan Susceptable to Fraud," Neil Roland, Bloomberg.com, 04/12/07

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Copyright (c) 2007 by Carola Von Hoffmannstahl-Solomonoff. This material may be freely distributed subject to the terms and conditions set forth in the Open Publication License. This license relieves the author of any liability or implication of warranty, grants others permission to use the Content in whole or in part, and insures that the original author will be properly credited when Content is used. It also grants others permission to modify and redistribute the Content if they clearly mark what changes have been made, when they were made, and who made them. Finally, the license insures that if someone else bases a work on this Content, that the resultant work will be made available under the Open Publication License as well.


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