Hawaii Randy's Real Estate Opinions: New mortgage fiasco in the making?

New mortgage fiasco in the making?

This is an extremely insightful post from one of the respected mortgage industry folks from Las Vegas.  I think Esko hit it on the head.  Those who ran around causing a major part of the sub-prime mortgage problems are using similar tactics today with FHA financing.

The financial system has taken it to the chin repeatedly over the last few years thanks to multiple factors, one of which was the subprime home loan product. Many eager borrowers were able to secure funding for a home purchase using its flexible underwriting criteria although many really didn't have the means to keep making payments in the long term. The loans were structured with the idea that the real estate market would continue to expand and if it somehow tanked, well, that probability wasn't considered much at all. And so the bubble burst and the subsequent damage is severe.

As a result the subprime programs were swept into the trash bin and that was that. For a while anyway.

A host of the subprime lenders and brokers who prospered during the boom years and then for one reason or another exited the scene are now coming back. The niche they are presently involved in is in many ways similar to the subprime one. It's the FHA, or Federal Housing Administration, product that is primarily designed to cater to first-time homebuyers, although all applicants are welcome, has reasonable income standards and requires a down payment as low as 3%. Borrowers pay FHA a fee that insures loans against default but ultimately it is the taxpayer who guarantees these mortgages.

The problem here is that these former subprime mortgage lenders, some of whose background includes bankruptcy filings, civil lawsuits, state disciplinary measures and a few criminal convictions, are using the same high-pressure sales tactics they did before to make loans. And they are supposedly sometimes involved in outright fraud just to get to the closing table. The bottom line is that the paper they write goes bad at a rate much higher than national average. In the big picture, only about 4% of all loans were FHA in the fall of 2007 and a year later, today, it has soared to 26%. And that number is likely to grow even more in the coming months and as it does more of these poorly-underwritten loans will start falling behind and ultimately face foreclose. Sounds familiar? 

To qualify to do these loans a company has to be approved by FHA. Why, then, isn't FHA weeding out the unworthy applicants? For one the agency is way understaffed to handle the surge of applications it's getting nowadays. The systems in place probably are ill-prepared to catch everything they are supposed to catch. Staff training might also need an upgrade. Perhaps pressure from who knows where unduly influences their decision making. It's possibly a little of bit of all of this.

Anyway, FHA is one of the main players in the government's far-reaching plan to rescue the housing industry and to allow it to operate with minimal supervision is irresponsible, to put it mildly. It's clear that there is a power vacuum in Washington right now and from the way things are going at this point it will unnecessarily prolong the real estate market's recovery. Sadly, the word responsibility has a hollow ring to it.    

 

 

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Randy L. Prothero, REALTOR®

Broker-in-Charge, ABR, AHWD, CRB, CRS, e-PRO, GRI, MRP, SFR

eXp Realty

Team Leader - "The Prothero Group"

Randy Prothero is well established as an expert in working with military / VA clients and first time home buyers.  His home seller's (listing) campaign is one of the most aggressive marketing programs in the area.  His luxury home listings sell faster and for more money.

Based out of Mililani, Hawaii. Randy services the island of Oahu (Honolulu County) Performs mediations and ombudsman services for the Board of Realtors.  To improve overall professionalism in his area Randy also offers classes for real estate agents. 

www.HawaiiRandy.comOahu (Honolulu County) Property Search  Hawaii Military Relocations

Comment balloon 12 commentsRandy Prothero • December 05 2008 06:52PM

Comments

Randy, Esko is a very knowledgable Loan Officer, and someone whose blog I subscribe to and read, even though I will agree with a little of what this, there is more that I will disagree with.  I made a comment on Esko blog and I will re-state it wrote here.

"I will agree that some of the shady Lenders and Loan Officers that abused the subprime programs and created a lot of the mess we are in, are now trying to stretch the guidelines of FHA. But I will disagree that they will be able to do to FHA what they did to subprime. Even though FHA is experiencing a lot more loans then in recent years, the guidelines are much tighter then subprime. For one the ratios are much lower, and loans has to get an Approved/Eligible through Automated Underwriting, because if it doesn't and gets even a Refer/Eligible the ratios tighten up even more. That is just one of many areas that suprime and FHA differ greatly. I am not going to turn this comment into a blog, so I will finish by saying that we need to be more concerned with how the con artist can manipulate the Conventional Loan Programs (Fannie Mae & Freddie Mac) than the FHA. DE Underwriters work to hard to get that designation to risk losing it by knowingly approving a bunch of bad loans."

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 10 years ago

Randy....I agree, I just had a call from a "loan Person"  and the first thing I thought when he threw the pitch was..."Here we go again!"

Posted by William Feela, Realtor, Whispering Pines Realty 651-674-5999 No. (WHISPERING PINES REALTY) almost 10 years ago

George - I am seeing too many scary loan officers and brokers out there who have not changed their ways.  I reposted Esko's blog article because I feel he raised some valid concerns.  I hope you are correct.

Posted by Randy Prothero, Hawaii REALTOR, (808) 384-5645 (eXp Realty) almost 10 years ago

William - I am seeing them almost daily.  They are also staking signs along the side of the roads advertising VA & FHA.  I hope George is right and we are not heading into phase 2 of this mess.

Posted by Randy Prothero, Hawaii REALTOR, (808) 384-5645 (eXp Realty) almost 10 years ago

Randy, Esko is one of the good guys, I just don't share the same fear.  The scary loan officers will always try to bend and stretch the rules and will probably manage to do some harm, but not to the extend of what they were allowed to do with subprime.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 10 years ago

George - It would make things a lot better if we could somehow get them weeded out.

Posted by Randy Prothero, Hawaii REALTOR, (808) 384-5645 (eXp Realty) almost 10 years ago

Randy - thanks for sharing Esko's article. I missed it, and this would have been a bad one to have missed. We have a ways to go, don't we? Talk about 4.5% fixed rate loans sound pretty good, however. We'll see.

Jeff

Posted by Jeff Dowler, CRS, The Southern California Relocation Dude (Solutions Real Estate ) almost 10 years ago

Jeff D. - I think we will see a new surge of activity if we hit 4.5%.  I am sure there will be so many refinancing that it will delay our sales.

Posted by Randy Prothero, Hawaii REALTOR, (808) 384-5645 (eXp Realty) almost 10 years ago

Borrowers pay FHA a fee that insures loans against default but ultimately it is the taxpayer who guarantees these mortgages

...and the taxpayers have never had to pay a dime on that guarantee.  HUD does an excellent job at risk management including oversight of the people originating those loans.  The HUD licensee (the broker/lender) is ultimately responsible for the actions of its employees.  The penalty for insufficient supervision?  Having your "eagle" pulled.

I understand Esko's "concern" but have a lot of faith in HUD oversight.

Posted by Brian Brady, 858-777-9751 (San Diego VA Home Loans/858-777-9751) almost 10 years ago

And why is it I can't seem to get in the mood to write about the RE market??!!

Posted by Susie Blackmon, Ocala, Horses, Western Wear, Horse Farms, Marketing almost 10 years ago

Randy,

I read Eskos article....I'm just hoping I don't see it here in FL but I'm sure we are on the top of the list.

Posted by Neal Bloom, Realtor CRS-Weston FL Real Estate (eXp Realty) almost 10 years ago

Brian B. - I hope you and George are correct and we have little to worry about.

Susie - You must be getting ready for Christmas.

Neal - I am seeing so many scary loan officers running around, that I am sure they will try.  Hopefully as Brian and George believe, they will not get away with it.

Posted by Randy Prothero, Hawaii REALTOR, (808) 384-5645 (eXp Realty) almost 10 years ago

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