The announcement from the Federal Housing Administration last month that its expanding mortgage backing to those who, during the recession, filed for bankruptcy or lost their homes to foreclosure or short sale, left many wondering how beneficial such a program would be.
However, Equifax (EFX) Chief Economist Amy Crews Cutts believes the program may be more successful than many think — and for different reasons too.
The FHA program requires one hour of counseling, which must be done a minimum of 30 days prior to applying for a loan. Crews Cutts told HousingWire that the hoops people generally are forced to jump through are burdensome, which is one reason the plan will succeed.
She noted that, while it’s only an hour of counseling, the fact that every borrower that applies for the loan has to attend it is likely to weed out borrowers who are less serious about owning a home. "Counseling itself will likely give them some valuable information," she added.
According to Crews Cutts, the counseling session may deter some borrowers from getting a home. While they may pass the class, it’s possible some borrowers will realize homeownership is not for them at this time. “It may actually cause some people to not buy a house," she said.
Crews Cutts noted that this program is a smart idea because fairly priced subprime credit will be crucial for the economy to get back on its feet. "I have a firm belief that we can not get ourselves out of this economic rut that we’re in until we have a fully functioning credit market, both in housing and in credit cards and other forms of credit," she said.
"There’s a very large number of people from whom this economy took down to their knees," said Crews Cutts. She added that until we can get those people back on track and allow credit to be extended to them, the economy will continue to struggle.
Things can happen to people and they have a good explanation for it, but it turns their credit score into that of a subprime borrower. It doesn’t mean they’re permanently that way, noted Crews Cutts. "If we won’t serve them, then we’re not servicing ourselves," she added.
The economist noted that the FHA is not giving these loans out for free. "FHA will cost you more than a conventional loan," she said.
But according to Crews Cutts, the FHA is doing exactly what it was created to do. "FHA was not created to give a loan to Donald Trump," she said. "FHA was created to regain the trust between banks and consumers."
While the housing market is still a far cry from it peak, Crews Cutts believes we are on the right path. The borrowers who were financially compromised will now be able to contribute to the liquidity of the housing industry, a necessary move to get everything flowing once again.