Home Loan Scamming Is Still Going Strong -- and Now You're Paying for It

By Yasha Levine, AlterNet. Posted June 16, 2009.

The FHA was helping the developers out, too. Even with boosts like the new accounting rules that allow banks to keep existing homes off the market (which boosts banks' assets and inflates home values by limiting supply) and taxpayer-funded cash perks for purchases of newly constructed homes, it could only work with zero-risk loans. No bank would consider giving a loan on obviously overpriced homes these days, especially with people with borderline bad credit. But thanks to the FHA, lenders literally cannot lose on these high-risk customers. So they are happy to hand out loans to all comers. In fact, places like Braeburn only sell to people who qualify for an FHA-backed mortgage: first-time home buyers. Fact is, FHA loans were the only reason places like Braeburn were still open for business. And that may not be such good thing.

FHA loans have been around since the Great Depression, helping working-class Americans buy their first homes by providing government insurance that guarantees certain types of loans at no risk to the lender. Until recently, they have been largely a force for good. During the civil rights movement, for example, FHA loans were retooled to help African Americans purchase homes. But like most public programs designed to help the American people, the FHA has been hijacked by big business -- in this case, the banking and real estate industries.

It was really a coup de etat for everyone involved. When the subprime market collapsed, President George W. Bush pushed Congress to heavily expand the the FHA loan program, increasing its budget, lowering entry requirements for both lenders and debtors. Eventually, our elected officials even took care of the bothersome 3.5 percent down payment requirement for the loan with all sorts of free cash.

Right now, the FHA is in essence giving out no-money-down loans to anyone who doesn't already own a house, regardless of credit history. In California, first-time homebuyers purchasing a freshly built home receive instant cash in the form of a tax credit: $8,000 from the feds (soon to be increased to $16,000) and $10,000 from the state. Local governments are also throwing in some goodies.

"I have some some money from the school facility fees that I can get. Like you need 3.5 percent down, but I can get you about $4,000 of that from down-payment sources. That just came back. It was gone but it's back," said the sales lady at Braeburn, lowering her voice just a bit that made it seem this was some sort of racket. "And we pay the $10,000 closing costs for you, as well. It's a win-win situation."

Win-win, indeed. If you bought Braeburn's largest home at base price, you'd pay nothing up front and have more than $5,000 left over for some new furniture, a 40-inch LCD TV and a weekend trip to Disneyland.

Homeowners have never been offered a better deal, but many won't hold on to their purchases for very long. It is common real estate industry knowledge that the less a buyer puts on a down payment, the more likely that buyer is to default. But no one seems to care, not the banks and not our government. In fact, Connecticut Sen. Chris Dodd, hardworking bank-shilling Democrat, has been pushing to increase access to FHA by making them available anyone, and not just first-time homeowners. He also wants to push the new-home federal tax credit to $15,000.

Under the guise of helping economic recovery, the bill is really a multidimentional wealth transfer, funding bank profits with taxpayer money while cutting taxes (tax credit is just another way of reducing tax revenue). This plan has received wide support.

The whole racket is so crude and so obviously doomed to end in disaster that papers like the Wall Street Journal, normally a champion of Thatcherite houseowning, have tried to blow the whistle:

The Next Housing Bust

Everyone knows how loose mortgage underwriting led to the go-go days of multitrillion-dollar subprime lending. What isn't well known is that a parallel subprime market has emerged over the past year -- all made possible by the Federal Housing Administration. This also won't end happily for taxpayers or the housing market.

Last year, banks issued $180 billion of new mortgages insured by the FHA, which means they carry a 100 percent taxpayer guarantee. Many of these have the same characteristics as subprime loans: low down payment requirements, high-risk borrowers, and in many cases, shady mortgage originators. FHA now insures nearly 1 of every 3 new mortgages, up from 2 percent in 2006.

See more stories tagged with: subprime, real estate, victorville

Read more of Yasha Levine's work at eXiledonline.com.

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