Easy-money mortgages still provided, by the feds

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By Patrice Hill

So you thought easy-money mortgages with little or no down payment for people with bad credit was a thing of the past? Think again.

You can get just such a loan today - and it's guaranteed by the federal government.

Loans insured by the Federal Housing Administration (FHA) have become "the new subprime," and these loans are exposing taxpayers to the same kinds of soaring default rates and losses that brought down Fannie Mae and Freddie Mac as well as destroyed many banks and the private market for mortgage loans.

While private lenders learned a lesson from the mortgage crisis and are shying away from easy-money loans, the FHA has stepped into the breach. The agency has provided backing for 37 percent of all mortgages used to buy homes this year.

After the collapse of much of the private mortgage market last year, Congress and the George W. Bush administration greatly expanded the FHA's original Depression-era program aimed at assisting sales of modestly priced homes by more than doubling the ceiling on loans that the agency can insure to $625,500 while maintaining its loose lending terms - ensuring that nearly any home sale could be covered by the agency.

The FHA's predominance was enhanced further this year when Congress lifted the ceiling to more than $729,000 for major urban areas and passed an $8,000 tax credit for first-time homebuyers that can be accelerated for borrowers to use as a down payment on FHA loans and avoid any cash commitment to their home purchases.

While these changes were intended to be temporary and expire by the end of the year, given the fragility of the housing and mortgage markets, Congress is considered likely to extend them this fall.

The significant expansion and liberalization of FHA's loan programs is enabling Americans to go back to many of the same bad credit practices that analysts say were at the root of the housing crisis, likely feeding further waves of default and foreclosure. But this time it is the taxpayer - not the banks - who could end up holding the bag.

Whitney Tilson, manager of investment firm T2 Partners LLC and author of "More Mortgage Meltdown: 6 Ways to Profit in These Bad Times," called "cataclysmic" the surging default rates of more than 30 percent on loans insured since 2006 by the FHA. That is not far below the 40 percent rate of default and foreclosure on the notorious subprime loans that ignited the credit crisis.

"The FHA's portfolio is exploding and the taxpayer is now on the hook for 100 percent of the losses," he said.