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Is the Government Shifting Back to Risky FHA Loan Practices?

September 9th, 2013

Finding companies that offer FHA loan programs with poor credit scores may have just become more prevalent. According to the Wall Street Journal, the Obama administration wants to create a mortgage market that is more forgiving to borrowers who lost their homes due to the recession, an effort that could widen the pool of potential homeowners. Recently HUD implemented some change that enables certain applicants who went gone through a foreclosure or bankruptcy to be considered for a FHA mortgage. The applicants must have been working on improving their credit to become eligible to receive a new house loan insured by the Federal Housing Administration after waiting as little as 1 year.

To be eligible for the latest FHA home loan mortgage, borrowers must show that their foreclosure or bankruptcy was caused by a job loss or reduction in income that was beyond their control. Borrowers also must prove their incomes have had a “full recovery” and complete housing counseling before getting a new home loan. The Obama administration has made an effort to improve the home finance market to make it qualifying more achievable to people who lost their property to a short-sale or foreclosure due to the Great Recession.

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The FHA already offers among the most flexible lending standards today, requiring down payments of just 3.5%. “It’s difficult to see how lenders would even consider doing mortgages with higher risk” in the current environment, said David Stevens, the chief executive of the Mortgage Bankers Association, who served as the FHA’s commissioner from 2009 to 2011. Lenders aren’t going to expand credit “while you’re suing them and threatening them over minor errors.”

Shaun Donovan, the secretary for the Department of Housing and Urban Development, made it clear that FHA has no plans to promote risky home mortgages. He said, “What we are talking about is getting back to responsible, plain-vanilla lending,” he said in an interview. “We believe these are low-risk loans that can be made safely.” In the four years ended last September, some 3.9 million homes had been lost to foreclosure. About 1 million borrowers who went through foreclosure during the crisis have already waited the required three years to be eligible for FHA home loans, and by early next year that number could rise to 1.5 million, according to estimates from Moody’s Analytics. The government through Fannie Mae, Freddie Mac or federal agencies has guaranteed as many as nine in 10 new mortgages in recent years. But over the past four years, banks have had to buy back tens of billions of defaulted loans as Fannie, Freddie and the FHA faced mounting losses.

The article was written by Nick Timiraos. Read WSJ original article.

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