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FHA May Go Bankrupt, Says Wall Street Journal Columnist

[Nov 25, 2009.]


Even as mortgage rates dipped this week to match record lows, Harvard Business School professor Robert Pozen argues in today's Wall Street Journal that the Federal Housing Administration is well on its way to total insolvency.

Pozen blames the FHA's dire predicament on the extension of the first time homebuyer's tax credit.

While blaming the problem on this tax credit seems rather contrived, certainly the FHA is in an exceedingly tight spot. As an insurer of home loans for low to moderate income borrowers, the FHA has been caught in the eye of the mortgage storm.

The result of that storm is that the FHA now holds only 0.53 percent in cash, relative to the amount of home loans it insures. This is below the 2 percent capital requirement that is mandated by law. However, laws often do not apply, or apply in limited fashion, when a boat is sinking.

Is the FHA a sinking boat? And if so, what does that mean to FHA refinance hopes?

FHA Failure Could Impact All FHA Refinances

The FHA has been doing more and more business as the private mortgage industry has crumbled. According to recent reports, FHA home loans now account for as much as 36 percent of total mortgage applications.

The FHA streamline refinance has been a last refuge of the famous "low documentation" refinance. And now, even FHA streamline refinance qualifying guidelines are being tightened.

For many FHA home loan borrowers, the collapse of the FHA would mean the end of refinancing.

FHA Can Still Save Itself

Luckily, it's not all gloom and doom. There are concrete--and totally logical--steps that the FHA can take to save itself and thereby keep hope alive for low downpayment home loan borrowers.

First of all, the FHA can throw overboard the down payment assistance programs that help people get into homes without having any skin in the game whatsoever. Here is one such program, in California. Yes, affordable housing is a noble goal, but these "assisted" loans are defaulting like crazy.

Secondly, and this is already happening, the FHA can tighten up its lending standards.

Everyone who wants refinancing a mortgage to be as possible as possible should be rooting for the FHA to right the ship before it's too late. The alternative is not pretty for the refinance market as a whole.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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