Independent mortgage companies get home loans for borrowers with weak credit or low incomes—and taxpayers back them

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by COMPUTER1313

www.bloomberg.com/news/features/2018-05-24/small-time-bankers-make-millions-peddling-mortgages-to-the-poor

Taylor had recently filed for bankruptcy because of his $25,000 in credit card debt. But he just bought his first home for $120,000 with a zero-down loan from Christian’s company. Monthly debt payments now eat up half his take-home pay. “If he can help me, he can help anyone,” Taylor says. “My credit history was just horrible.”

Christian can do this kind of deal because he is, in effect, making the loan on behalf of the federal government through its most important affordable housing program. It’s a sweet deal: He gets his nearly risk-free commission. Taylor puts no money down. If things go south, the government ultimately bears the risk.

No one is saying the system is close to another collapse. Yet nonbanks, more loosely regulated than the JPMorgan Chases of the world, are bigger players today than during the last mortgage bubble, according to a Brookings Institution report. They’re making almost half of new loans, compared with 19 percent in 2007. As before, many are companies you’ve never heard of, like American Financial Network, a closely held firm based in Brea, Calif. A few are better-known, such as LoanDepot, Freedom Mortgage, and the industry leader, Quicken Loans, with its ubiquitous Rocket Mortgage television commercials.

Nonbank mortgages make up about 80 percent of the loans for borrowers insured by the U.S. government.

To protect taxpayers, FHA borrowers are supposed to make small down payments, equal to 3.5 percent of the home’s purchase price. But many FHA borrowers put nothing down at all.

In civil fraud complaints, the Department of Justice has accused many companies, including Quicken and Freedom Mortgage, of improperly underwriting FHA loans and then filing claims for government insurance after borrowers defaulted.

There are other worrisome signs. Even in a strong economy, recent FHA loans are souring faster than those made years ago when the industry had stricter credit standards, the Mortgage Bankers Association says. About 9 percent are 30 days or more past due, manageable by historical standards and well below the high of 14 percent in 2009. But the FHA itself is concerned that, on average, borrowers are spending 43 percent of their income on debt payments, the highest level in at least two decades.

Last year the FHA’s capital reserves barely met the legal minimum the government must set aside for bad loans.

If too many loans sour, she says, the FHA could end up financially weakened and unable to extend help during the next downturn. “Borrowers are stretching more,” she says. “We’re concerned about it from a borrower perspective and a taxpayer perspective.”

One reason more borrowers may be stretching: Real estate prices are soaring again. Bidding wars are back in many cities. That’s only making it harder for first-time and lower-income borrowers… Homeownership has fallen from its 2004 peak of 69.2 percent to 64.2 percent in the first quarter. Rents are skyrocketing, too, pricing some families out of any shelter at all.

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There are other worrisome signs. Even in a strong economy, recent FHA loans are souring faster than those made years ago when the industry had stricter credit standards, the Mortgage Bankers Association says. About 9 percent are 30 days or more past due, manageable by historical standards and well below the high of 14 percent in 2009. But the FHA itself is concerned that, on average, borrowers are spending 43 percent of their income on debt payments, the highest level in at least two decades.

The average FHA borrower is spending 43% of their take home on their debt????

This is the reason why government should not be involved in home loans, no private entity would make a 30 year commitment to a borrower like that if they were on the hook for it.

People forget that higher interest rate and/or higher down payments are market signals to borrowers. If the market sets a down payment that’s too high for a borrower it’s a signal that they shouldn’t be taking on this debt. The FHA is doing these people no favors by removing this important market signal. With 43% of your income going towards debt payments there can be very little saving or much of anything going on.

 

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