In light of my earlier post framing the FHA loan program as part of the solution to an industry recovery, the NY Times is reporting that the program has lost $4.6 billion. The article does not say if it was in the past 12 months or in 2007. It doesn’t matter. The problem is not the program itself.
Brian D. Montgomery, the F.H.A. commissioner, attributed the unanticipated losses primarily to the agency’s seller-financed down payment mortgage program, which has suffered from high delinquency and foreclosure rates in recent years.
In other words, legalized fraud. If I were selling you a home and I funneled you a 3% down payment in an undocumented side deal, I would be a criminal. But if we were to funnel the money through a “nonprofit,” it would be kosher. But the result would be the same: the borrowers would have no skins in the game so to speak, and the default rate would be far higher.
The lesson is clear. 100% financing, zero down, or whatever nomenclature you choose to use, causes more harm than good. People who do not have their own money in the deal do not have enough at stake. To put it another way, if you have no money for even a 3% down payment, you have no business buying a house. The FHA, therefore, is right to drop this practice post haste.
J. Philip Faranda
