Posted on Tuesday, August 11, 2009
FNMA and Freddie learned from their mistakes. The mammoth GSEs cut back suicidal no doc loans and similar train wreck products. But incredibly FHA continues practices that led so many to crash and burn.
The only thing standing between naïve first time homebuyers, and pre-ordained foreclosure are down payment, credit score, and debt-to-income ratio requirements essentially designed to protect first time buyers from themselves. These are the exact “traditional” guidelines that were recklessly ignored during the bubble and are credited with causing the lion’s share of our nation’s foreclosures. And yet FHA is still leaving the decision to require a higher credit score, bigger down payment or better ratios to the lenders “selling” FHA loans, perpetuating the now infamous bubble temptation of large volume and profits over prudent lending.
FHA’s failure to keep up with market needs arguably created the opportunity for subprime mortgages in the first place, all while the Agency sat idly by, well aware that the number of US real estate transactions were surging whilst their own market share curiously all but disappeared. And now FHA’s failure to learn from the bubble error is not only putting new homeowners at risk, but recklessly exposing us all to another $560 billion in brand new risky mortgage loans, four times 2006 levels.
And like the subversive web woven by securitization the first time around, FHA’s secondary market relationship with the Government National Mortgage Association (“GNMA”), the entity charged with bundling, guaranteeing, and selling FHA insured mortgages, has grown since the bubble into a tax payer owned trillion dollar packager of risky mortgages, issuing a record $43 billion in MBS in June alone. At this rate GNMA MBS will exceed $1 trillion before 2011, more than double its 2007 exposure, not to mention the exposure to global investors buying from GNMA in a seemingly blind repeat of recent history. As Roosevelt’s Home Owners Loan Corporation (“HOLC”) eventually became the largest owner of U.S. homes following the Great Depression, so are taxpayers slated to become the single largest owner of homes today thanks to FHA’s continued reckless gambling.