This time, they’re called FHA mortgages, and according to BusinessWeek, they are the new subprime drama in waiting.
FHA mortgages are guaranteed by their namesake, the Federal Housing Administration. Devised in the New Deal era, the mortgages were to provide a means for low income people to buy their own home.
But now they seem to be the latest juicy toy in the hands of the same loan sharks that brought you their subprime trash mortgages.
BusinessWeek reports that so far, 4,4 million Americans have taken out an FHA mortgage, adding up to a total of 475 billion dollars. But that’s not all.
The federal government wants to prevent subprimers from defaulting, and seems to be using the FHA option to aid them. People with subprime mortgages, who are in danger of foreclosure, can switch to an FHA mortgage.
In principle, that isn’t a bad thing. Granted, those people should never have been allowed to take out a mortgage in the first place, but that’s another matter.
Unfortunately, the FHA does not check whether the people taking out the loans are really former subprime victims, or new subprime victims.
The FHA leaves it to the loan sharks to decide who is eligible for an FHA mortgage, and who isn’t. There are no checks and balances, and there is no regulation. Even if there was, the FHA would not have the manpower, the infrastructure or even the legal permission to check up on the lenders.
The companies mediating the mortgages are also the ones lending the money. That while the FHA doesn’t even properly check the backgrounds of the lenders applying for an FHA permit, which is necessary to be able to hand out mortgages.
As a result, several infamous companies from the subprime-era are now back in action, offering FHA mortgages to poor people.
The problem this time is that, if someone with an FHA mortgage has to foreclose, it isn’t the home owner or the lender that has to pony up the dough. In the end, it’s the taxpayer, because the FHA covers the mortgage.
The loan shark dishes out the FHA mortgage, bills a percentage of the total sum as commission, and when the home owner defaults on the loan, the loan shark simply gets his money back from the Federal Housing Administration.
I don’t have an MBA, but that doesn’t sound like a healthy business model. If I were the director of the FHA, or even the President-elect, I would be very worried.
Especially now that the current Administration and Congress want to pump an extra 300 billion dollars into the FHA guarantee fund, while doubling the maximum mortgage amount to $625,000.
Message to Obama: push the Bush Administration and Congress to put a stop to this, until such time that the FHA has the opportunity to regulate and do checks and balances. With all the problems, it’s hard to see how the US economy – or even the world, for that matter – could take another subprime crisis.