Well, the new FHA expansion bill appears to be rocketing through congress with virtually no opposition.

I got my email from NAR last week, (several times in fact) asking me to make sure that I contacted my congressional representatives to request passage of this bill.   

NAHB is in strong support of the measure, saying that it will help stablize the housing market. In fact, if you read the mainstream media, you would get the impression that this bill has no opposition anywhere. You may even think that this idea will be beneficial for you if you are an agent or broker who is suffering under the strain of the present slump in retail sales.

However, there is a HUGE downside to this bill. The problem is not in wanting to help people and stabilize the largest single asset class in America. That is a noble goal, but the means to achieve the end simply do not add up. In my opinion, and that of most other real estate market analysts,  this expansion of FHA will not solve the subprime problem. It will simply move it from the banks and professional capital investors and instead place it squarely in the laps of the American taxpayers, as subprime lending practices move from the world of capital investors to the world of government guaranteed loans.

  Most folks don't realize what "government guaranteed loans" actually are.   

Under FHA the taxpayer actually guarantees the mortgage payoff. When a home that has an FHA loan on it gets foreclosed on, the lender does not lose their money, as happened with the recent subprime losses that wiped out some investors and investment companies. When an FHA loan gets foreclosed, the government actually reimburses the lender for the balance of the mortgage note. Meaning - the lender gets paid off by Uncle Sam and HUD becomes the proud owner of a foreclosed home.   

Ever wonder where all those HUD houses come from? They are homes with government guaranteed loans that were foreclosed. Now Uncle Sam is the proud owner. Problem is, Uncle Sam is using taxpayer dollars to provide these guarantees. Then HUD tries to resell the home and recover it's expenses. When HUD homes sell at a loss, it is you and I that foot the bill. The real loser in this scenario is the same hard working American taxpayer that the government claims to be helping.   

Expanding FHA to allow for higher Loan To Value limits, "no downpayment" loans, and adding easier condo financing is tantamount to moving subprime lending from the little known corners of capital investing, and secondary mortgage markets, into the living rooms and pocket books of middle America.   

"No Downpayment" and "High LTV Loan Amounts" are considered "subprime" for a reason. That reason is their tendency to produce much higher default rates. Well duh...that is exactly what has happened to subprime. Higher default rates caused by relaxed lending standards have nearly led to a world economic crisis. It makes absolutely no sense to me to now decide to throw good money after bad. Especially when the taxpayers are the ultimate source for these loan guarantees. If you've ever wanted to be like Elvis, and buy houses for people you've never even met, here's your chance. But at least Elvis did it with his own money, not someone elses.

Everyone in Washington wants to be seen as doing something to "fix" this problem. "Broadening" and in effect lowering FHA's lending standards will fix things alright. In my opinion, this idea is a violation of every common sense rule for smart investing. I predict that this program will only move FHA into the subprime lending business, and set the US (and the US housing market) up for an even bigger financial disaster in the future.

Below is a list of the highlights of the new FHA expansion act. Where would the US economy be today if these items had already been in place prior to 2005? What if they had been enacted prior to the collapse of the current housing market? With condos overbuilt in many cities, and values falling like rocks, and a few million more properties with no equity and 40 year payoffs where the heck would the US economy be right now?  

The only reason we survived the current storm is the fact that the Federal Reserve injected money into the system to help keep it afloat. We came very close to a 1929 style crisis. It was narrowly averted. The average taxpayer does not realize that next time, it will be their money that will be paying back these loans. It really makes me wonder what our government leaders are thinking...no wait - I know what they are thinking..."get me reelected", that's what they are thinking.   

Meanwhile, next time you pass a HUD house, or show one to a prospective buyer, take pride in knowing that you own a small piece of it. And now, you'll get the chance to buy even more...say, doesn't that make us all real estate moguls? I'll bet you didn't even know you owned so many houses already!  

FHA Expansion Act Includes The Following Items:   

1- There won’t be a minimum 3% down payment which

means you need less cash at closing.  

2- New 40-year loans will lower your monthly payment.  

3- The FHA loan amounts can be higher which

means more homes would qualify for financing.   

4- Condos will be more easily insured with an FHA loan.  

5- You don’t have to have perfect credit.  

6- More seniors will be able to get reverse mortgages.  

None of the measures being added to the expansion act has any basis in common sense financial principles. Only a return to solid fundamental financial principles will save our housing market and stabilize it over the long run. We have to realize that there are no quick fixes for poor financial management. It's high time that our leaders realized that you cannot solve financial problems by creating more debt. You may disguise the problem, but you won't get rid of it. But this time, they have me really worried. This bill is cleverly disguised as help for homeowners, but in reality it is you and I who are behind the mask. ***

 

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