Yesterday’s Case Shiller housing data was scary enough all by itself–housing prices have dropped a whopping 5% just in the past year. What nobody is factoring into the equation yet is one of the government’s favorite weapons of mass destruction–FHA loans.
Taxpayer insured mortgages are all the rage as conventional loans have become harder to come by. Now that all of the cows have escaped and been run over by semi trucks, lenders have sealed the barn door shut and requiring borrowers to prove they can actually repay their loans as well as put up some kind of down payment.
FHA borrowers, however, can get away with shaky credit and 3% down. Too often, that 3% and closing costs are rolled right into the loan. FHA loans are what keeps many mortgage brokers and appraisers in business these days.
If that doesn’t scare you, consider that in my market, I’ve noticed that FHA loans are often closing with significantly higher sales prices than comparable units sold via conventional financing. Something is very wrong with this picture.
As prices continue to drop, these food stamp backed mortgages are going to go very bad.