We all have that crazy relative that makes a series of disastrous decisions that make us shake our heads. “When will they learn? Why do they keep making choices that make no sense?” We secretly sigh a sigh of relief that no matter how bad we mess things up it will never be close to our disaster prone cousin/uncle/nephew etc.
Enter FHA, the crazy relative of the lending world.
Several years ago FHA decided that money laundering was an acceptable practice. A large number of loans were closed in which the seller gave a portion of their closing proceeds to a charitable organization which then in turn gave those funds to a buyer that had no down payment. Not surprisingly, these loans defaulted in droves and FHA had a mess on their hands.
We’ve all told crazy uncle Nester that the newest pyramid scheme involving acid washed jeans and pictures of David Hasselhoff with a mullet would fail – just like the last ill-conceived business venture involving trained ferrets giving motivational speeches to clients with adult onset ADD. We should have done the same with FHA.
Fast forward to 2012 and after mounting losses to their insurance fund FHA has raised their monthly mortgage insurance premiums by approximately 400%. Press releases will show that FHA is trying to shore up its losses by raising expenses. But don’t be fooled. In reality these changes are another version of acid washed jeans with monogrammed David Hasselhoff pockets.
What FHA is doing is effectively eliminating the very best clients from obtaining loans backed by FHA. Customers able to use other financing options will do so – and should do so. What FHA will be left with is customers with very marginal credit or funds arrived purely from gifts from relatives. And, by doing so, they are setting themselves up for a clientele that is more likely to default than the customers they are losing.
FHA has gone from being a great option for most consumers to being an option for consumers with no other way to obtain financing. It’s a shame really but the changes to the program have made FHA a third place winner in a beauty contest with three contestants.
You can tell uncle Nester you told him so later.