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
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,
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