FHA Dutifully Following Sub-Prime Playbook
Agency Offers Low Teaser Rates, Questionable Refi Loans
That’s right, FHA is now insuring mortgages with low teaser rates that balloon after a year. See the last bullet-point in this screenshot via Quicken Loans:
They also require tiny/nill downpayments. And it gets better: No income verification! See the last line in this screengrab from Quicken Loans:
Short-sighted much?
Similar loans, known as Ninjas (no income, no job, no assets) were a major part of the sub-prime debacle. While I’m all in favor of getting people out of loans they can’t afford, this is a horrible way to do it. It rewards the private sector by putting all the risk on taxpayers, while lenders reap all the profits.
See last month’s FHA: Bailout Waiting to Happen for more on the scale of the problem. It’s big, with FHA insuring 23% of all loans made in 2009.
I’ll leave you with one more screengrab:
Disclosure: No position in any companies mentioned
3 Comments
Hey Adam – Kelly from Quicken Loans here. I just wanted to clear up a few things from our perspective since you mentioned us.
We’re one of the nation’s largest FHA lenders. We’re proud to offer a few different FHA loans, all of which have fixed rates. All also require a minimum 620 credit score, higher than FHA requires normally.
Let’s start with defining balloon mortgages. Typically, balloon loans do not fully amortize and leave a balance due at maturity. Our FHA Rate Break is not like that at all. It is a fixed rate loan that will be paid off in 30 years or sooner, should they client choose to pay it off. Rate Break is most akin to buying discount points, which we all know can get you a lower mortgage rate.
With the FHA Rate Break option (also called a Temporary Buydown), funds are deposited into an escrow account at close and then released in monthly installments that are applied to the mortgage payments over the following 1 or 2 years, depending on the Rate Break option you choose. As a result, the client’s monthly payment obligation is reduced during the term of the plan. Rate Break is only available on home purchases, not refinances.
On the other hand, FHA Streamline is only available as a refinance loan. They’re just as they sound – a streamlined version of typical FHA loans. They require that you currently be in an FHA loan. Because of that, the FHA has more flexible guidelines. They already know a lot about these clients. It’s also worth noting that if the client’s payment goes up with their new FHA Streamline loan (because of shortened term or switching from ARM to fixed), they must “credit qualify” – meaning we have to verify income, assets & credit like a normal FHA loan. Like you said, these streamlined loans are meant to get people out of loans they can’t afford.
In addition, changes to FHA Streamline are coming next month. They’re effective for FHA case numbers issued on 11/17/2009 and after. They include:
- To roll in any costs, the client must obtain a new appraisal
- Discount points can never be rolled in, the client must always pay them at close
- Assets to close must be fully verified
- Verbal verification of employment will be required
We’ve made these upcoming changes available on our website:
https://www.quickenloans.com/mortgage-news/federal-government-revises-refinancing-process-for-fha-streamline-mortgages-5749
Rest assured we always make it our goal to put our clients in the best loan possible. We work hard to educate every client and I wanted to make sure none of the content on our site is taken out of context or explained incorrectly. I hope my explanations make sense to you and your readers. If not, I’m always available for questions.
- Kelly@QuickenLoans.com
Thanks for the opportunity to explain.
Kelly
[...] Loans’ responded to my piece on their FHA-backed loans, I posted it in-full below. Kelly makes some good points, and apparently [...]
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