Saturday, August 2, 2008

FHA Personal Accounts (Return of the DAPs!)

(Calculated Risk) It took approximately twelve minutes for some of the bigger economic illiterates in Congress to sponsor a bill to reauthorize FHA DAPs--a form of money-laundering in which property sellers can inflate their sales prices by funneling money to a "non profit" which then "gifts" the funds to the buyer of the property.

Not content merely to pander to the most naive of their constituents by lining first-time homebuyers up to face foreclosure at three times the rate of those who don't get these generous "gifts," the sponsors of this bill, Representatives Al Green (TX-09), Gary Miller (CA-42), Maxine Waters (CA-35), and Christopher Shays (CT-4), would also like to redefine the very nature of the FHA mortgage insurance program, so that insurance premiums paid by those borrowers who do not default are not used to cover the losses on those who do default. Presumably, the funds to cover the losses on those borrowers who do not make their payments would come from the premiums that people who do not make their payments are not paying. Here's the draft bill:

Section 2133 of the FHA Modernization Act of 2008 is amended by adding at the end the following new subsection:

(c) AUTHORIZATION FOR RISK-BASED PRICING.—
(1) AUTHORITY. —Notwithstanding subsections (a) and (b), the Secretary of Housing and Urban Development may implement a risk-based premium product for borrowers with lower credit or FICO scores, to facilitate the availability of insurance for mortgages for such borrowers, through the establishment and collection of adequate premiums to cover the risks of such loans.

(2) REFUND OF PREMIUMS. —The Secretary shall provide for a refund of a portion or all of the higher premiums paid at the time of insurance by borrowers with lower credit or FICO scores as a result of risk-based pricing pursuant to this subsection, except that such refund shall be limited to only borrowers with a history of at least a specified number of years of on-time mortgage payments. Such refund shall be made upon payment in full of the obligation of the mortgage.
Apparently, it's not good enough for Congress that any borrower who makes two years or so worth of on-time mortgage payments (and, um, isn't upside down) can qualify for a streamlined standard FHA refinance that would lower the monthly insurance premium to the level of a "good credit" borrower. Now we have to reimburse those borrowers for the higher premiums they paid during the term of the original loan.

This is certainly a curious view of what "insurance" is. Apparently the sponsors of this bill think of mortgage insurance premiums as a kind of escrow: what you pay in is "dedicated" to covering only your own potential default, and if you don't default you get it back. Of course, there's no provision here for requiring deficiency judgments against borrowers who do default, in the highly likely event that the premiums those borrowers paid from inception to default isn't enough to cover FHA's loss. So you know who's going to pay for that.

But don't let me give you the impression the bill proposes no safeguards against risk: the bill requires that these DAP programs offer optional "homebuyer counseling" to all borrowers prior to closing, and it requires that if the borrower opts for counseling, the DAP must provide that counseling. If the borrower blows you off, you just close the loan. I suppose it is obvious to Congress that a borrower who declines counseling knows what he or she is doing. Now that I think about it, though, a borrower who scorns being counseled by the seller's money launderer is probably smarter than a box of rocks.

Perhaps the FDIC could ignore bloggers for a while and just keep its eyes on Congress.

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