FHA's New Risky Loans Make Housing Even Riskier


Forgive me for not getting to this sooner, but every day in the housing crisis is hairier than the last. But I certainly didn’t miss the announcement last week by the Housing and Urban Development’s Hope for Homeowners program that new regulations would help more troubled borrowers get in on a newly-modified, FHA-backed loan.

Just as a little background, the Hope for Homeowners program was part of legislation passed in July and instituted October 1st. It was designed to get lenders to write down principal on loans to 90 percent of the current value of the home, so as to give the borrower some equity. Then the borrower would get a lower interest rate that amounted to a monthly payment of no more than 38% of his/her monthly income. The government would, in turn, back the loan should it ever default. The applications had to come from the lender.

Since October 1st, HUD reports barely 150 applications from lenders. Yep, that’s just applications. Apparently the lenders weren’t too keen on that principal write-down. So HUD announced new regulations, telling lenders that they only have to write down to 96.5 percent of the current value, and homeowners would not have to spend more than 31 percent of their monthly incomes on the mortgage. The loan could be extended to 40 years.

Progress? Try risk! With home prices falling as fast as they still are (Realtors reported existing home prices down 11 percent in October), how exactly is getting a loan that is really only giving you 3.5 percent equity in your home going to help?? Isn’t this how we all got into this mess? The no-money-down, low-interest-rate loan?

The only difference here is that instead of some lender or investor being left holding the bag, now you and I, the already beaten and battered taxpayers, are left holding the bag. Any loan modified under those criteria today will likely lose all equity in the home in the coming months anyway. Home prices are expected to decline even further in 2009.

Oh, and one more thing. The Realtors today said that they're hearing from their comrades in the field that all these "modified" loans are RE-defaulting at a rate of 50 percent!! Not exactly a huge success rate. So if that stands with the Hope for Homeowners program, then FHA is going to be paying for half the loans it helps to modify.

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Trust me, I was mad enough at all the over-hyped, over-aggressive, under-attentive lenders during the housing boom. But this just makes my blood boil, because this is MY money, and thanks to the housing crash I already have less of it. Government needs to help get the housing market back on its collective feet, but taking on even more risk isn’t the way to do it.

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Questions? Comments? RealtyCheck@cnbc.com