“When everyone else is greedy, be scared. And when everyone else is scared, be greedy.” – Warren Buffet
In the last quarter, almost half of all mortgages were FHA insured mortgages. There are some that think such large government involvement in the mortgage market is bad for the housing market and its participants. I am not one of these people. I believe that it is beneficial for FHA to be increasing their market share of the mortgage market for the reasons I’m about to list.
To begin with, FHA does not issue mortgages. What FHA does do is insure them in the event of default by a borrower. Virtually every single consumer bank in the United States funds the mortgage, and then obtains an FHA insurance certificate that attaches to the loan, provided that loan is underwritten according to FHA loan guidelines.
So why should FHA be insuring so many mortgages? First of all, if they weren’t, about half of the mortgages would not be funding. Think of the debacle this would create. Values would get whacked even more, more REO inventory would pile up, and we would be experiencing a severe double dip housing bust. Not a good thing for anyone in the real estate market.
The reason why there should be no fear of the government’s increasing role is because the loans that they are now insuring will perform. The borrowers who now qualify, really qualify, and now can no longer state income and assets and obtain a loan. Further, values have come crashing down to reality and rates are at historic lows, two important events that converge to give them a payment that closely approximates what the fair rental of the property would be, thus providing an exit strategy, something homeowners of the past never considered. So now, if a borrower loses his job and can no longer afford the house, he can rent it instead of walking away from it. I never understood how buyers in the past could buy a home that left them with a $4,000 a month payment, when that same house only rented for $1,800. No exit strategy! Not much thinking either. And of course they didn’t have very good council, because the person they sought out to handle the financing for the most important contract they would ever sign, was the twenty four year old “loan officer” who was the friend of a friend, not a seasoned professional with the expertise and experience to guide them.
In addition, the quality control that is in place should prevent those who don’t qualify from getting a mortgage, and should eliminate the rampant fraud and criminal activities that led to all the mortgage problems in the first place. FHA lenders now verify the income that a borrower claims to make with the IRS. This is done by completing and validating IRS for 4506T, which provides the lender with a transcript of the applicant’s filed tax return.
Lenders (and FHA) need to be vigilant in one other area of quality control, and that is appraisal. Appraisal procedures have seen dramatic changes in the past two years, most of them for the better. However, a lender needs to have in house appraisal review of the appraisal submitted with the loan. This will ensure that any stretching of values or any monkey business with the appraisal is discovered, and the offending party will get on the kind of list he doesn’t want to be on.
FHA’s market share is going to increase due to other factors. Fannie Mae and Freddie Mac have been bailed out to the tune of 170 billion dollars and counting, and many doubt these GSE’s ability to survive their current financial problems.
Finally, recent financial overhaul legislation requires the lenders of non-fha mortgages to retain a five percent “skin in the game” for every mortgage they originate, which is going to stifle non-FHA lending. FHA should heed Warren Buffet’s advise, because everyone else is scared right now.