Heralded as a savior in reversing the mortgage market’s woes, risks to the agency could cost taxpayers dearly, says one mortgage expert, as Washington morphs the FHA from a helping hand for low-income home buyers into a back door bailout for the imploding mortgage industry. Trouble is, there's little choice at this point.
“Nobody is talking is talking about it, but in three years the FHA bailout is going to cost taxpayers at least $100 billion dollars,” said Guy Cecala, a mortgage industry insider and publisher of Inside Mortgage Finance. “Everybody on Capital Hill recognizes that there will be significant costs, but they’re trying to keep the housing spigot open even if it will bring in some bad water down the road.”
Even in this sinking market, borrowers only need to put 3% down to qualify for FHA backing, and borrowers currently unable to pay their adjustable-rate mortgages after the rates reset are allowed to refinance into FHA-backed mortgages.
With U.S. home prices down 10% in the last 12 months and expected to fall perhaps 10% more in the coming year, the vast majority of homes the FHA insures in 2008 will be underwater. Requiring only a small down payment in a declining market is extremely risky because negative home equity has proved the best indicator for default in this housing cycle.
“If it costs upwards of $500 billion down the road, should it not be done?” asks Cecala. “If it keeps the market running and FHA becomes the lender of last resort, policymakers really don't have an alternative.”
The bind is that the government wants people out there buying houses. So even though with only 3% down lenders know it is almost a sure bet that the house will be underwater after the purchase the system will not change. The gamble appears to be propping up the housing issues now while hoping that things get better in the future. This can be done by still trying to create the largest possible pool of homebuyers - and 3% down allows alot more new buyers. But how many of these 3% downers will need a bailout in a few years? This is a combination of bailing out the current homeowners by propping up the market.