There are a few hot topics in the real estate industry and those are loan modifications and FHA loans. One helps borrowers stay in their current loan situation with a slight modification the other allows people to refinance or purchase into a new, federally back loan.
Both products are being sold by companies that were not already stable with selling A paper products and according to a Business Week article are coming from the sub prime markets with questionable pasts. Many of the same companies that put borrowers in loans that could not afford the payments are now working the system to put questionable borrowers into FHA loans.
The article states a number of examples where corporate executives and owners have been able to restructure their operations to eliminate their shady past, that in some cases included lawsuits, fines, bankruptcies and even jail time, to have the possibility of acquiring an FHA license. In the last year FHA loans have grown from 60,000 in January to 160,000 in September. Today more then 36,000 lenders have FHA licenses, up 56% from the summer of 2007.
You would imagine the Federal Housing Administration would be properly vetting each company that applies for an FHA license, especially since the mortgages are backed by tax payer dollars, but that is simply not the case. The reason for this is that staffing for the FHA as remained level even with the increase demand and publicity. Today, only a call, maybe two take place to evaluate if a company is legitimate. This opens the flood gates for any all companies to risk tax payers dollars and hand out FHA loans. No not all companies specializing in FHA loans are unscrupulous sharks, but it goes without saying that the FHA loan is one of the more flexible loan products available in todays market and couple that with sales and processing skills of ex-subprime sharks, you have a risky mix.
What happens when these loans go bad? Who gets to bail out the borrower again? I can see loan modifications helping borrowers in their need of trouble, however many will still default on their loans. Are we going to see a similar cycle we saw in sub prime and will soon see with Alt A products in the coming years, in the FHA product. Maybe it is simply something we have to live with moving forward.
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