FHA foreclosure bailout

Some members in Congress are proposing the Federal Government help out those people who cannot afford their mortgage payments by offering up to $300 billion in loan guarantees from FHA. They want FHA to refinance peoples existing loans (if they qualify) as long as the original lender reduces the principal on the loan to 85% of the current market value. The thought behind this is that the borrowers would get out from unworkable debt and the original lenders would receive more than they would by foreclosing. It would prevent many more foreclosures from flooding our markets.

My opinion is FHA is already stretched to the limit. Unless I am mistaken it is one of the only government programs that is financially self-sufficient since the funds to run the department come from mortgage insurance premiums. If FHA insures these loans they would have the probably a larger portfolio of insured loans that the 5 private MI companies have now. This would transfer the majority of risk billions of dollars for future foreclosure from the banks and private MI companies to the Federal Government (tax payers).

Would this really stop foreclosures or just slow it down? Will it bring the real estate market back to a balanced supply and demand with realistic home values? I believe home prices when adjusted for inflation increased 85% from 1997 to mid-2006. How much did rental prices increase during that period. Will lower prices stimulate demand again? If so with the current mortgage environment who will be able to buy? If the government attempts to put a band-aid on the housing market will it lead to inflation in other parts of the economy reducing the dollar more and driving up prices for everything else we buy?

I think the members in congress is setting us up for future problems and untimely it will be the tax payers that have to foot the bill. I am sorry so many people are loosing their homes and don't mean to sound jaded about hit. We now know that greed was the driving factor in the institutional lending arena. Some of the blame should be directed to the people who bought homes that should not have bought homes. We all know the reasons why so many did. Should the people who decided to wait until they saved some money and worked on improving their credit and decided to rent instead of buy until they were ready have to foot the bill. Should the banks and investment houses get a bail out plan paid by the hard working Americans that did not jump into the frenzy?

Some of the people that will pay for this mess are the future homeowners of America. After the recession of 1982 FHA raised their Upfront Mortgage Insurance Premium to 3.2 percent of the mortgage so FHA could payoff the previous losses they had incurred. The past 10 years as FHA has had to pay off less claims it has dropped to its present level of 1.500%. FHA will probably increase the premium in the future...they have already increased the premium on Condos recently.

Shouldn't we just let the market run its course and correct itself? Real estate runs in cycles and has down years and up years. Buying a home is still an investment and has risk involved. Maybe I should contact Senator Dodd and ask him if I could get some of my money back on the bank stocks I own that are worth less than I paid for them. After all the stock prices are a direct result from the banks making bad loans with my money.

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