Should We Go Back To The Future With HUD

By Peter G. Miller

March 30, 2008

12
0
Sign In
to Rate & Comment

There’s a great irony building in the mortgage marketplace. While Wall Street melts down, lenders fail and more than a million homes are likely to be foreclosed this year, business at HUD is booming.

As of the last two weeks of February, FHA loan applications have been pouring in at the rate of more than 1.7 million per year — that’s up 170 percent when compared with the previous year.

The recent results reported by HUD have arisen despite the reality that FHA mortgages are positively dull. With an FHA mortgage you can’t buy or refinance without 3 percent cash or equity. No stated-income loan applications are allowed, full docs only if you please. To stop illegal flipping you can’t use the program to finance a home that’s been sold within the past 90 days. And if you get an FHA mortgage there are no worries about “gotcha” clauses: the FHA bans prepayment penalties and mammoth rate increases when ARMs re-set.

During the past few years the FHA mortgage program has largely been regarded as a flop and a failure. The reason? While the real estate marketplace was booming, FHA originations were falling. In fiscal 2003 HUD insured 1.4 million loans, a number that fell to “only” 555,000 FHA mortgages in fiscal 2005 largely as a result of competitive “affordability products” sold by lenders — the toxic loans which are now at the heart of the foreclosure meltdown.

But as good as the FHA program is today, it used to be better. There’s a strong argument to be made that the huge federal program would best serve borrowers by returning to the standards it had in place 25 years ago.

Back To The Old Days

While the government has loaned hundreds of billions of dollars to bailout those who hold mortgage-backed securities, it’s done virtually nothing to help the huge numbers of homeowners nationwide who face foreclosure.

HUD figures show, for example, that only 436 borrowers with delinquent conventional mortgages were able to refinance under the highly-touted FHASecure program during the entire month of February. As to the HOPE NOW program, a voluntary effort by lenders, a study just completed by the California Reinvestment Coalition found that lender efforts to help distressed homeowners have actually declined since last August.

It doesn’t have to be this way. The FHA program already meets the requirements of most borrowers who want mortgage products with little down and no surprises. Investors are happy to buy such loans, even in these troubling times.

But years ago, when I bought my first home, the FHA program was better. The reason? Interest rates for FHA mortgages were determined by the federal government, a practice that stopped in 1983.

Public Pricing

Let’s imagine that we go back to a situation where FHA loan rates are set by HUD and that all rates are expressed at “par” — a term which means interest rate quotes are made without points.

In contrast to the hundreds of billions of dollars now at risk to support iffy securities created on Wall Street, the publication of daily FHA rates would cost taxpayers just about zero and entail no public risk. The benefits, however, would be enormous.

With a public rate system, everyone would be able to get the daily interest cost for FHA loans by going to the HUD website. HUD could have an automated email distribution system that would broadcast the daily rate to anyone with an interest in the subject. Websites and newspapers could also post daily HUD rates.

Borrowers would know that if they locked in a loan on a given day that the rate at closing would be exactly the rate posted on the day they locked.

Borrowers would also find other benefits if HUD returned to its earlier practice.

First, by quoting “par” prices there would be no need for borrowers to fumble with a confusing mix of rates and points — which is better a loan at 6.125 percent with two points or 6.2 percent with .4 points? By publishing rates at par, every borrower would know exactly what an FHA loan will cost. (If the loans lasted 10 years, the 6.125 percent mortgage would have an APR of 6.57 percent while the 6.2 percent loan would have an APR of 6.29 percent.)

Second, the issue of lender/customer obligations would be eliminated.

While most attorneys and real estate brokers have a “fiduciary” obligation to serve the best interests of their clients, most lenders want no part of such “agency” requirements. Instead, they prefer the relationship that typically exists between customers and used-car dealerships.

“Some have proposed,” says Harry Dinham, a former president of the National Association of Mortgage Brokers, “that a fiduciary duty standard should be implemented and mortgage originators and their loan officers should act in the ‘best interests’ of the consumer. NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.”

“A lender underwrites, approves and funds the loan,” according to John Robbins, a past Chairman of the Mortgage Bankers Association. “The lender does not hold himself out as an agent of the borrower. While a lender must serve its customers fairly, and the industry has done much to assure high professional standards, a lender owes a duty to its shareholders and investors. A borrower knows a lender offers its own products and does not offer to shop for borrowers.”

Really? Do borrowers know such things? Where is the ad which says that a lender is not offering the best rates to consumers?
If HUD set FHA interest levels then all lenders would sell the same FHA loan products at the same price. The debate about the obligation of lenders to get the best possible rates and terms for borrowers would be over because borrowers would know exactly what they should pay for FHA loans — and no more.

Would such a system work? Actually it worked quite nicely until 1983, a time when the advantage of cheap and instant web postings did not exist.

“Since August the federal government has attempted to stem the mortgage crisis, in large measure by extending aid and concessions to big firms and huge investors on Wall Street,” says James J. Saccacio, Chairman and CEO at RealtyTrac.com, the leading online marketplace for foreclosure properties. “If it’s fair to change the rules for folks on Wall Street, why not also change the system to benefit borrowers nationwide? A return to mandated interest rates for FHA loans would cost virtually nothing and assure borrowers that they were getting the best possible rate at the time of application.”
____________________
Columnist Peter G. Miller is the author of The Common-Sense Mortgage and is syndicated in more than 100 newspapers

Reader Comments
Overall Article Rating:
12
0
Peter S
Article Rating:
excellent ideas--send it to your congresspeople!
A Yahoo! Contributor
Article Rating:
The articale is great. I am responding to the comment.. "Live and Learn..." What is that? The inofrmation is this article is not news!!!. I hear all the blame on the banks and finance officers. People need to take resposibility for their own action and not buys home that they can not afford..
ElleMae
Article Rating:
If under the Bush plan FHA would be able t insure $300 billion in troubled loans for owner occupied homes, if lenders voluntary write down the appraised value to at least 85% in order for homeowners to be able to make their mortgage payments..I submitted a package to my mortgage lender back in the middle of april and I am still unable to speak with the person handling the modification request package at citi-mortgage, it continues to say that the mail box is full unable to leave a message. I would hope to get assistance. My mortgage package was done by AMC mortgage in Fallson, MD who assured me that they would assist me with my mortgage for the first 6 months because they knew it was too high, but never followed through on it. I would just like to get mortgage down to the apprised value amount in order to keep my residence, but so far I have not heard from citi-Mortgage but hope to soon, I did go through counseling with the Hope help forclosure line who also assisted .
None
Article Rating:
Working around a bunch of mortgage brokers at the office complex where my former employer leased space was an eye opener at the height of the real estate boom. Brokers and their employees worked night and day to close as many mortgate deals as possible is as short a time as possible! I figured then if there must be a lot of money involved, they all drove very expensive cars, they were either doing something illegal, immoral or unethical! Who knew it was all three and then some? Only them and our government leaders who were helping them by changing laws to make it easier and safer to do at the expense of their constituents! Only way to stop it is to throw out the whole bunch and start over beginning with this election year. First, really know who you are voting for and what they really stand for which I know is not easy with the media hacks and PR types who turn every candidate into a chameleon. There is little time to get this process going if we're to save our country and the world!
TN disapointed
Article Rating:
Thanks for making this easy. Now I know how I got ripped of..I had a hud mortgage, it was sold several times, each time the interest rate would go up, each time I tried to re-finance I was told I could not do it, the payments got so high I finally had to sell the place at a huge lost, it cost me more to sell it that out down payment....live and learn...never again

Latest Real Estate Headlines

In the news:

Jul 25, 2008 , Contra Costa Times
Jul 25, 2008 , Miami Herald
Jul 25, 2008 , San Francisco Chronicle
Jul 25, 2008 , Miami Herald
Jul 25, 2008 , Miami Herald
Jul 25, 2008 , The News & Observer
see all Real Estate and
Mortgage news

Search

City & State or ZIP
to
Related Yahoo! Services:
Jobs - Personal Financial Advice
 Help us improve Yahoo! Real Estate - Send Your Feedback - Partner with Yahoo! Real Estate
Some Yahoo! Real Estate information is provided by our trusted partners.
However, Yahoo! does not guarantee the accuracy or completeness of any third party content.