by Nancy Osborne, COO of ERATE®
(11/7/2009) The former Chief Credit Risk Officer at Fannie Mae, who accurately forecast the bailout at both GSEs Fannie Mae and Freddie Mac back in 2008, has now forecast a similar bailout ahead for the Federal Housing Administration (FHA) in the next 2-3 years.
The FHA insures loans against default and has picked up most of the slack left by the void of Fannie and Freddie and the private sector since the mortgage meltdown began, as the FHA is now insuring almost 6,000 loans per day.
However learning from past mistakes seems to be something that the HUD regulated agency is incapable of, rather than coming to the conclusion that much of the housing crisis was caused because homeowner's were not required to contribute make-sense down payments (recall all those zero down payment loans leading up to the bubble), rather they have chosen to shift the focus onto the creditworthiness of borrowers instead.
The FHA has maintained that they are insuring loans with borrowers having higher credit scores than in the past and that 60% of the loans they insure are in fact prime loans, as if this is the sole key to sound lending.
Clearly good credit is not the only factor and it is the down payment or equity position of a borrower that is also critical in contributing to mortgage payment default or the lack thereof.
Research shows that the rate of default is 3 times higher when a borrower has financed a no-down payment loan. Because FHA is insuring loans with a minimum down payment of only 3.5%, a default rate of 20% is forecast in the future by the former Fannie Mae Credit Risk Officer.
With the presence of state and non-profit down payment assistance programs, in conjunction with the housing tax credit the government has been offering since February, borrowers are perilously close to the zero down payment level now.
Choosing to deny their current lending criteria is risky and failing to correct it and learn from prior lending mistakes is nothing short of unconscionable. When will the hemorrhaging of taxpayer money finally come to an end?
Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
"I am addicted to Bloomberg TV" says Nancy.