Sunday, November 23rd, 2008 at 5:35 PM
FHA – the New Subprime?
While we’re talking about FHA, check out Business Week’s article:
The former subprime-mortgage brokers are now selling FHA loans in much the same fashion. Unlike the subprime loans, borrowers have to qualify for FHA financing, so hopefully only the worthy will get a loan.
But when you look at the characters, you may have some doubts…..from the article:
The resilient entrepreneurs who populate this dubious field are often obscure, but not puny. Jerry Cugno started Premier Mortgage Funding in Clearwater, on the Gulf Coast of Florida, in 2002. Over the next four years, it became one of the country’s largest subprime lenders, with 750 branches and 5,000 brokers across the U.S. Cugno, now 59, took home millions of dollars and rewarded top salesmen with Caribbean cruises and shiny Hummers, according to court records and interviews with former employees. But along the way, Premier accumulated a dismal regulatory record. Five states—Florida, Georgia, North Carolina, Ohio, and Wisconsin—revoked its license for various abuses; four others disciplined the company for using unlicensed brokers or similar violations. The crash of the subprime market and a barrage of lawsuits prompted Premier to file for U.S. bankruptcy court protection in Tampa in July 2007. Then, in March, a Premier unit in Cleveland and its manager pleaded guilty to felony charges related to fraudulent mortgage schemes.
But Premier didn’t just close down. Since it declared bankruptcy, federal records show, it has issued more than 2,000 taxpayer-insured mortgages—worth a total of $250 million. According to the FHA, Premier failed to notify the agency of its Chapter 11 filing, as required by law. In late October, an FHA spokesman admitted it was unaware of Premier’s situation and welcomed any information Business Week could provide.
You’d think the government would have had Premier on a watch list. According to data compiled by the FHA’s parent, the U.S. Housing & Urban Development Dept. (HUD), the firm’s borrowers have a 9.2% default rate, the second highest among large-volume FHA lenders nationally.
Now, members of the Cugno family have started a brand new company called Paramount Mortgage Funding. It operates a floor below Premier’s headquarters in a three-story black-glass office building Jerry Cugno owns in Clearwater. In August 2007, only weeks after Premier sought bankruptcy court protection, the FHA granted Paramount a license to issue government-backed mortgages. “I am the only person in the country who really understands FHA,” Cugno says with characteristic bravado.
Are the government officials going to take the time to monitor the incoming loans for quality? Or are they in such a hurry to spend the money that they’ll worry about future defaults later?
Posted on Sunday, November 23rd, 2008 at 5:35 PM in Mortgage Qualifying | 6 Comments » | 
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We know that the Hope for Homowners program didn’t get off to a great start, so they fixed it. Well, fixed it enough to include a few more borrowers, but I doubt it’s enough.
From housingwire:
With fewer than 100 applications for FHA loans through Hope for Homeowners since the program’s effective start date of Oct. 1, it was clear some “meaningful changes” were needed. The U.S. Housing and Urban Development secretary Steve Preston on Wednesday announced that the Hope for Homeowners (H4H) Board of Directors has approved changes to the program to help more distressed borrowers refinance into affordable, government-back mortgages.
The changes include increasing the loan to value ratio (LTV) from 90 to 96.5 percent for some H4H loans; for borrowers whose mortgage payments represent no more than 31 percent of their monthly gross income and household debt no more than 43 percent. Raising the LTV ratio reduces the gap between the existing loan balances and the new H4H loan and decrease losses to the existing primary lienholders, according to a HUD press release regarding the announcement.
Another change to the program involves simplifying the process to remove subordinate liens by permitting upfront payments to lienholders in exchange for releasing their liens, to permit more borrowers access to the program. Previously, subordinate lienholders who released their liens were only eligible to receive a small recovery payment when the home owned by the H4H borrower was sold, creating a substantial delay and not necessarily guaranteeing any return for subordinate lienholders.
The last change will allow lenders to extend mortgage terms from 30 to 40 years, possibly reducing borrowers’ monthly payments enough to make it possible for them to qualify for the plan and save their homes.
Jim the Realtor | November 23rd, 2008 at 5:54 pmBottom line, I can qualify for a FHA loan on a house I can’t afford. Their income ratios really need to factor in state tax – they’re written as if there was none, so states like California once again will have a flood of defaults.
To be specific, can someone making $103,824 in California really afford $4,158.75 payments on a $565,000 house, even after the mortgage interest tax deduction? I make way more than that and I can’t despite being debt free.
What’s going to happen is people who can no longer get sub-prime will rush to FHA. With most of them having no idea of what house they can actually afford, they’re going to base it on what the FHA tells them. I was shocked when I called my local bank 2 years ago and heard them tell me I could take out a loan on a $600,000 house. The income ratios simply don’t make any sense for Californians in my tax bracket.
BDiego | November 23rd, 2008 at 9:35 pmBingo BDiego!
Only through time and error will banks (assuming they will be allowed to learn from their mistakes) move back to roughly 3x income. Current “affordability” assumes you value your house more than anything else and would rather spend on nothing else, you don’t need to save for retirement or for a rainy day, you have no plans to buy a car or make major repairs/improvements to the house, your income will remain steady and/or grow over the years…you get the point.
Average Joe | November 23rd, 2008 at 10:19 pmVery well said, BDiego.
Tyrone | November 23rd, 2008 at 10:33 pm.
Thanks Jim for posting this. I posted a comment under your FHA/VA topic regarding this but the post never appeared.
I could not agree more with BDiego. It’s shocking to find that the government is giving such an unmamangeable loan – i think many of the new FHA loans will be in default pretty soon given the economic condition, leaving us all on the hook to bail them all out! what a sad situation.
SDAndy | November 24th, 2008 at 12:15 amHi,
You posted: “If you have trouble qualifying for both houses without the rental income on the old one, FHA allows for you to move into a third residence (in with parents, rent an apartment, etc.) for six months. They’ll call the old house an investment property, and use the rental income towards qualifying.”
What is the source of this information as I cannot find anyone else backing this up.
If what you posted is true, this can really help us in the Ohio market in getting a new home through FHA. Our current home would have to be short sold but we are trying to find other options before considering that.
Thank you.
lookingtobuyinOH | January 31st, 2009 at 9:50 am