Neu Leonstein
22-11-2008, 13:02
http://www.businessweek.com/magazine/content/08_48/b4110036448352.htm
FHA-Backed Loans: The New Subprime
The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more
As if they haven't done enough damage. Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.
You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country's swooning economy.
For generations, these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there's a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what's happening—or incapable of stopping it. They're giving mortgage firms licenses to dole out 100%-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.
[...]
For mortgage lenders during the boom years, creating subprime mortgages by lending to people who shouldn't have gotten any money was a good business because they could sell the mortgages on. That allowed them to make a commission and carry very little risk for themselves. Because subprime loans would charge more interest, and financial engineers thought they could take the risk out of these loans, commissions were actually greater for subprime loans than for the good ones.
That's over now, but the brokers have found themselves a new business: using the FHA (http://en.wikipedia.org/wiki/Federal_Housing_Administration) to take the risk off their books and make sure there still are customers.
There are essentially two ways of thinking about this: you can think the brokers are evil for pawning this risk off to the government, or you can think that the FHA is essentially doing precisely what it was set up to do - with the risk to the taxpayer being the price FDR was ready to pay in the 30s, and politicians seeking to use the program to stop foreclosures and allow people to stay in their homes are ready to pay now.
So what do you reckon? When people talk about putting a bottom on the housing market by making finance available to new buyers and especially offer refinancing to people in strife now, there is obviously an element of risk involved - you're lending to people who are in a sorry financial state. Are you happy with the government taking this risk?
FHA-Backed Loans: The New Subprime
The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more
As if they haven't done enough damage. Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.
You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country's swooning economy.
For generations, these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there's a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what's happening—or incapable of stopping it. They're giving mortgage firms licenses to dole out 100%-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.
[...]
For mortgage lenders during the boom years, creating subprime mortgages by lending to people who shouldn't have gotten any money was a good business because they could sell the mortgages on. That allowed them to make a commission and carry very little risk for themselves. Because subprime loans would charge more interest, and financial engineers thought they could take the risk out of these loans, commissions were actually greater for subprime loans than for the good ones.
That's over now, but the brokers have found themselves a new business: using the FHA (http://en.wikipedia.org/wiki/Federal_Housing_Administration) to take the risk off their books and make sure there still are customers.
There are essentially two ways of thinking about this: you can think the brokers are evil for pawning this risk off to the government, or you can think that the FHA is essentially doing precisely what it was set up to do - with the risk to the taxpayer being the price FDR was ready to pay in the 30s, and politicians seeking to use the program to stop foreclosures and allow people to stay in their homes are ready to pay now.
So what do you reckon? When people talk about putting a bottom on the housing market by making finance available to new buyers and especially offer refinancing to people in strife now, there is obviously an element of risk involved - you're lending to people who are in a sorry financial state. Are you happy with the government taking this risk?