More FHA-Backed Mortgages Go Bad Without a Single Payment

The Washington Post (like everyone else who has covered this story so far) has not completed the thought: the worst contributor to this wave of FHA defaults is no doubt seller-funded downpayment assistance loans, which tend to start borrowers out with inflated appraisals and underwater. Though there are no teasers, when they are hit with a hardship, they have no hope of selling the house normally, as the negative equity is so bad (remember, these people could not afford the 3% downpayment in the first place).

For those not following this story, seller-funded downpayments were made illegal in the Housing And Economic Recovery bill last year (effective October 1st), but the industry cronies that profit from this practice are trying to resurrect it with HR 600. This would, of course, be an unmitigated disaster. And this should really, really scare people:

The agency's share of the mortgage market is up from 2 percent three years ago to nearly a third of the mortgages now made, its highest level in at least two decades, according to Inside Mortgage Finance, an industry trade publication. The FHA does not lend money directly. It provides mortgage insurance for borrowers working with FHA-approved lenders and uses the premiums to cover its losses. If the premiums are not enough, taxpayers could be on the hook.

At the same time, Congress has substantially increased the amount a homeowner can borrow on an FHA loan in pricey areas, thrusting the agency into markets it was previously shut out of, such as California, where plunging home prices have made people more vulnerable to foreclosure. Moreover, lawmakers last year put the FHA in charge of a program created to address the roots of the financial crisis by helping delinquent borrowers refinance into new mortgages.

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The Palm Hill Condominiums project near West Palm Beach, Fla., exemplifies the problem. The two-story stucco apartments built 28 years ago on former Everglades swampland were converted to condominiums three years ago. The complex had the same owner as an FHA-approved mortgage company Great Country Mortgage of Coral Gables, whose brokers pushed no-money-down, no-closing-cost loans to prospective buyers of the condos, according to Michael Tanner, who is identified on a company Web site as a senior loan officer.

Many of the borrowers were first-time home buyers and were unable to keep up their payments. Tanner said he complained to his company that extending loans without any money down lured borrowers who either didn't understand or take seriously the payments they'd have to make. Great Country's owner, Hector Hernandez Jr., could not be reached for comment.

(Notice how in the above they mention no-money-down FHA lending, but don't discuss the downpayment assistance programs that differ from "normal" FHA and how they, especially the seller-financed versions, are particularly dangerous.)