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The Greatest Mortgage Product EVER!

During my former fifteen-year career as a loan originator, I came across countless loan programs. In 1995, fixed rates were 11% and there were only a handful of mortgage loans offered by lenders. All of the agency loan types had limiting loan amounts, and scant portfolio products intended to help the self-employed person who was otherwise shut out of the mortgage marketplace. FICO scoring had just slithered out from under the rock from which it came, and national property values would begin their meteoric climb, and eventual crash, once again.

In the ensuing years, we saw thousands of reckless loan programs offered by lenders, backed by securitization and peddled to institutional investors by the snake oil salesmen of Wall Street. Ninja loans (no income, no job, no assets), the pay option arm (and a leg), Stated/Stated but somehow A+ rated, and zero down with zero chance the borrower was going to repay the loan, were offered by everyone. Sub-prime, loan-speak for poison, proliferated as underwriting sensibilities disappeared and Libor manipulation emerged.

The inadvertent corollary of this easy money encouraged droves of people to enter our industry, who didn’t know a thing about it or how to qualify someone. They didn’t have to. The only relevant question to the borrower was “What is your FICO score?”, because the rest of the underwriting, like income, down payment, reserves, collateral, and employment were purposefully taken out of the equation. No longer did you need to know about how to calculate income, view credit history, verify funds, read tax returns (who hasn’t been burned by 2106 expenses), MI factors and underwriting. The list goes on and on. Don’t ask, don’t tell, and for God’s sake, don’t look.

Then the day of reckoning came and went, taking with it trillions of dollars in stock market and property values, countless jobs and careers, and our once limitless confidence in our country and economy.

I illustrate this because to understand what I believe is the greatest mortgage product ever, is to understand the history of the other mortgages. The greatest mortgage ever has been around for quite some time, but historically is not frequently used. The only thing you can state when applying for this loan is your ethnicity at the bottom of the application. For many years, only 1 out of 10 lenders could originate the mortgage, given the requirements at the time. There is considerable bias against this loan product that can only be chalked up to ignorance and misinformation. The human mind, without proper information, will always fill in the blanks with negative information, every single time.

It is a fact that the best mortgage product is the FHA mortgage. And let me tell you the reason why. The FHA mortgage is one of two mortgages that are assumable by the buyer at the existing rate and term of the seller. The other assumable loan is a VA loan, but on a VA assumption, the veteran has continuing liability for the mortgage, while the FHA seller doesn’t. The seller who allows the buyer to assume his mortgage receives novation, which is the substitution of one contract for another. Assumption may not seem like much of a benefit, and that’s only because all interest rates have done during the past 20 plus years is go down, making assumption unnecessary.

The fifty-year average of the thirty-year mortgage is 8.5%. Yes, 8.5%. Rates have been going down and staying down for so long, this figure is hard to reconcile for most of you reading this. And the reason for this is the Fed, cutting rates and employing quantitative easing, purchasing mortgage backed securities and treasuries totaling almost two trillion dollars, which is keeping the cost of money artificially low. If you and I did what the Fed did, which is counterfeiting, we would be buying hot chocolate packets from Bernie Madoff.

So, I want you to envision the certain future mortgage environment where fixed rates are 8 percent, which is double where they are now. Demand would most certainly be weaker than it is now, and competition for the buyers in the marketplace would increase dramatically. Values would begin to drop precipitously, creating even less buyers. Default rates would rise, tightening credit once again, and making it harder again for buyers. Properties would sit on the market longer, which is never a good thing for values.

The one safe harbor from this maelstrom would be the almost 8 million assumable mortgages currently attached to residential properties. On the average FHA loan in this scenario, the payment on the assumption would be six hundred dollars less a month than the loan the buyer would otherwise have to obtain. There would be no Up Front Mortgage Insurance Premium (UFMIP) of 1.75% of the loan amount, because it was already charged to the current borrower. The buyer assuming the seller’s mortgage would be inheriting a loan with years shaved off of it, saving tens of thousands of dollars in interest. Similarly, MMI would automatically terminate much quicker on an assumed loan than a newly originated one, for those FHA loans where MMI isn’t lifetime. There would be no mortgage tax in the states that have one, which can amount to thousands of dollars in savings. Now comes the cherry. Once the buyer assumes the mortgage, he too can offer the assumption to a subsequent buyer when he sells.

If you still think that the FHA mortgage isn’t the greatest mortgage product even, consider this. The FHA mortgage is the only one that can, and will, enrich the borrowers bank account. Every single other one only drains it. The seller who has an FHA mortgage will have a greater pool of buyers when he sells, because more people will qualify with the lower payment his low rate loan confers. With the increased demand, price will rise. Buyers will look at the homes that have assumable FHA mortgages first before looking to ones that will require a new loan. Bidding wars for these particular properties will happen, because the present day value of large such monthly savings is substantial. Accounting for the increase in value won’t be a problem either, because an appraiser can adjust value for financing options offered by the seller.

Sometimes the federal government does get things right, and they did when they decided many moons ago to make FHA insured mortgages assumable. There are tens of millions of future homebuyers and sellers who are going to be able to take advantage of this benefit, a benefit that carries absolutely zero cost to the taxpayer. If all of this doesn’t convince you that the greatest mortgage ever is the FHA, then you haven’t been listening.