FHA Repeating Fannie and Freddie Mistakes All Over Again

Normally a company or even government agency would not choose to follow the failed policies of Countrywide, Indymac, Fannie Mae and Freddie Mac. Unfortunately, that is precisely what the FHA is now doing. As shocking as it might sound, the FHA is still offering mortgages with only 3.5% down and rates that are currently below private mortgage rates. It's not surprising that with these offers, they are quickly taking over the dominant position of mortgage origination in the U.S. From the WSJ:

In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.

...Resulting FHA losses are offset by premiums paid by borrowers. Federal law says the FHA must maintain, after expected losses, reserves equal to at least 2% of the loans insured by the agency. The ratio last year was around 3%, down from 6.4% in 2007.

As an example of why the FHA is so competitive, I recently found a quote for a private jumbo mortgage at 6.00%. The FHA-backed loan, which only required 3.5% down, was for 5.50%. (Of course, the FHA loan requires 1.75% mortgage insurance upfront, but that can be financed into your mortgage, so it makes it a no-brainer to use this option.)

Yes, the subprime lending world is still thriving...and we as taxpayers are financing it. I wonder what Barney Frank's excuse will be when the FHA needs a bailout - because it will...it's just a matter of time.