This is from Philly.com


3 1/2% ! Isn't this the kind of reckless behavior that got us in this economical mess to begin with? People buying homes with little to no money down. People buying houses they could not afford.

I also noticed the word can. So I would assume one can buy a home with no money down still

I guess we didn't learn our lesson. If we don't collapse this time around, this reckless behavior will cause the US to crash and burn sooner or later.

To answer you question shortly, no.

FHA does lend to the sub prime market, and do require very small downpayments, and the money for the down payment can actually be borrowed, or a gift, which is taboo in other mortgage loans. That being said FHA only makes fixed, low interest loans. The banks were doing something else entirely.

When the banks were lending to the sub prime category, they generally went with I-O loans or better know as ARM (adjustable rate mortgages). Now an ARM loan is an exotic one at best. These loans are generally used by people that are flipping houses. They intent to build equity in the house by improvements at a fast rate. The loans generally never reset on them. When these loans reset you could potentially see your monthly payment go from say $600 all the way to $2000+. Now assuming a person could even still afford to pay the loan at that point most would only be able to pay the minimum, which means the interest is compounding on top of the loan, this is know as negative armortrization. Now when this occurs the loan that you took out for a set amount is actually increasing. You could potentially pay the minimum on this type of loan for 100 years and not pay it off, hell in 100 years you still would not have the principle paid off to the 20% mark were you can drop the mortgage insurance.

So the type of lending that FHA is involved in is risky, but it is a calculated risk. What the banks were doing was a free for all, with no regard for who they (*)(*)(*)(*)ed in the process.

Now FHA has started to show some signs of weakness, but most attribute this to the long term high unemployment that we are seeing. Even with this they are backing most of the new loans going through right now, this should offset the loses they are taking on. So, it is highly doubtful that they will need a bailout, unless things detoriate way worse then they are now.

__________________
"Sell a man a fish, he eats for a day, teach a man to fish, you ruin a wonderful business opportunity."
Karl Marx

The median housing price in Aug of 09 was $195K.

With 'only' 3 1/2 % down, that is a down payment of $6,825.

If people keep losing their jobs, what incentive is there to stay in a house that you only have $6800 invested in? Its easy to walk away from this type of loan.

Now if someone was forced to put down $20K on a house, then its much more difficult for a person to walk away from. A sane and rational person would be trying to do whatever they can to protect their investment/home instead of just throwing their hands up and say, I give up, you can have the place back.

As long as this type of cheap credit keeps flowing, we are doomed to failure in this country.

How do you walk away from a mortgage?

In most cases regardless of the loan, or credit line, you have 150-180 days of non payments, and then you have defaulted. That is a big fat 9 on the credit report and if it is anything over the $1,500-2,000 mark, they will come after you.

Lets look at a scenario for a second, and for the sake of simplicity we will leave out some details;

Two different people both buy a $100,000 house.

The first person uses FHA and makes the minimum down payment of 3.5%. So they take out a loan for $96,500. (note, not acurate amount for the loan, but this is for simplicity)

The second person uses a conventional loan and makes a down payment of 20%. So the loan amount is $80,000.

Both people face some hardship in this economic downturn and get laid off. Neither can figure out a way to keep paying for their houses on unemployment, so they are both forced to sell.

Now the first person has a larger loan because of the lower down payment. Now in order for them to get out of their mortgage is to sell for the amount left, since this is a simplistic theoretical, we will assume no time passes, and the amount they have to sell it for is $96,500, or 96.5% of the total original cost. The second person only has to sell it for $80,000, or 80% of the original cost.

So in a down turn market, when houses are moving slow, which of the two has more flexibility, in say, lowering the price to unload the home? It would have to be the second person. The first person is basically screwed.

So while it maybe easier in one's mind to rationalize getting out of a house with less invested, we see that it is not quite so easy in reality to do so.


FHA is not cheap credit. They are insuring the loan, so that someone else will make it. If you default, they will pay, but not you, the bank. So their is a vested interest in seeing good qualities in loan candidate. While I mentioned, they would insure, say someone with sub par credit, they are most likely not going to do it if the mortgage payments work out to be the maximum of what they could afford in a month. The same goes with a down payment, a married couple straped with two kids could potentially be showing where they are paying a third more renting an apartment, but it is the extra that is not allowing them to make a substainal down payment. They can and will turn people down. When we look at the risky loans they insure, they do so with at least a format, that helps provide them with some security, it is not a handout to anyone who just applies.

FHA can be some pricks. When I sold my house this year, the persons buying the house were going through FHA. The inspector that came to my house informed all parties that I was not connected to the city sewer, even though, the last inspector said nothing. I had to pay to have it connect, or I simply could not sell the house to these potential buyers. Had this been a different situation, it may not have even come up, or over looked to make the sell.

I sold my house at a lose, and could do so because I made such a big down payment. I simply found a house that was bigger, better, and selling for a bigger lose then me, and bought it.

__________________
"Sell a man a fish, he eats for a day, teach a man to fish, you ruin a wonderful business opportunity."
Karl Marx

From the LA Times

From the Wallstreetpit.com

Please read the articles


They will come after someone? Sorry, there are way too many instances of people defaulting on their mortgages. Sure, people's credit scored will be damaged for years to come, but the banks wont try and sue. Too many people doing the same thing.


In reality, people are simply defaulting on their mortgages and then walking away. In your example, person one just defaults on the mortgage, then when the bank forecloses, person one says OK, I'm out of here.

Person two has $20K invested so they are far more likely to do whatever they can to keep paying the mortgage (the chances of selling in this market are small).

This is the whole problem with FHA given out cheap credit. And yes, buying a house with only 3 1/2% down is a cheap credit to me, and the whole reason we are in this mess to begin with. People buying homes with little to no money down.


Regardless of how FHA works, only requiring 3 1/2% down after what we are going through will just encourage more reckless behavior in the future. This just gives banks another license to be reckless once again so they can compete with FHA on home loans. I would be requiring people to have at least 10% down to buy a home.


YOU may have won out here, but YOU are not majority.

FHA is not making the loan, they are insuring the loan. So they are not competing with banks, the idea is to aid them in economic downturns by not letting credit completely freeze up, and extending loaning in good times. The fact that we have seen such a shift from conventional loans to FHA back loans is pretty hard proof that they are doing the job they need to be. Otherwise, we might have seen a complete freeze up in the mortgage market.

They also improve living conditions which is evident by what I said. The previous loan I got, the bank's inspector, said nothing about the city sewer hook-up, in fact he should have, because at that point it was illegal for them to sell the house to me. It was not up to standard living conditions in the area, but they remained quiet, I assume because they wanted my money.

__________________
"Sell a man a fish, he eats for a day, teach a man to fish, you ruin a wonderful business opportunity."
Karl Marx