Tuesday’s LendingLife featured this Bloomberg report that sounded a warning on pending mortgage lending crisis. The main allegations in that article is that the Federal Housing Administration insurance program is too over-extended and its borrowers too unqualified to handle their mortgages.

It touched a nerve with LendingLife readers, for sure.

The piece received a great deal of feedback, one of which needed to be republished in full, which you can find at the end of this article.

The lender at the center of the article, American Financial Network, put out a strong rebuttal in the form of a press release: "The truth is FHA loans are helping people realize their dreams of homeownership, and have been since 1934. As a FHA approved lender that has received much recognition over the last several years for positive achievements, AFN is also helping first-time homebuyers and others get into a home, possibly refinance to a lower rate or better product, or even buy an owner-occupied income property of up to 4 Units."

They continue to offer a defense of their lending practices in the following excerpt:

"The article suggests that "bankers make millions peddling mortgages to the poor." As previously stated, commissions are indeed made, and there are guidelines and regulations that cannot be waived or ignored when approving borrowers for FHA, USDA or VA financing. FHA loans are made to teachers, police officers, firefighters, first-time homebuyers, young families, empty nesters, and so many others who make real contributions to our society as a whole. Life happens, and sometimes people run into financial difficulty and/or get a blemish on their credit record. That doesn't mean they should not have an opportunity at homeownership. VA loans are made to our country's veterans and active duty service members; the best our country has to offer. No upstanding lender, which certainly includes AFN, would peddle any mortgage to an unqualified borrower."

Another comment, from the message board at the bottom of our article featured the view from a real estate agent.

“As a real estate agent and landlord and a 10 year veteran in real estate, I find FHA loan products,up to this point, as a model to other lending platforms, however, if what you are saying above is true than it is an absolute cause of concern and needs to stop because there will be no more bail outs after the last bail out and the complexity of the next downturn will be beyond the idiots that are running the government now.”

Whereas a professional working in mortgage servicing wrote the following on the HousingWire Facebook page: “So glad my Servicing portfolio is FHA free.”

The longest view came in a direct email to me, from a mortgage-lending consultant who we will also keep anonymous. This response , over the course of several emails exchanged) is just too good not to include in full [some comments edited to improve flow].

Anytime you have a homebuyer with a PITI payment that exceeds 40% of their gross monthly income, you have a high-risk loan.

Taxes keep going up, cost to live increases, adding new family members increases monthly expenses plus all the new credit card and car loan offering presented after the home purchase. If the consumer falls into the financial trap and accepting all the offers, they will soon be in financial trouble. Especially if it was a duel income family at the time of the purchase and then becomes a single income household. Many different things can cause that. 

Most first time homebuyers spend their emergency funds, if they ever had any to spend.

Now let’s talk about the monthly expenses that are always there but not taken into consideration during the loan app:  cell phone expenses, additional insurance, school expenses, clothes, dental, Dr. office visits not paid by insurance, gasoline, electric, gas, water, lawn mowing, house maintenance repairs, eating out, cleaners, eating lunch out during work week, snacks for kids, veterinarian expenses, medicine for pets, monthly medicines for house members, car expenses???

It all adds up.  Something no one seems to do.

When there is easy money available and certain consumers can’t say no to new credit offers, many of them will get into trouble as soon as something in their life changes downward financially. Such as getting laid-off, or needing to replace car, or medical issues that don’t allow going to work.

In my first email, I didn’t mention taking car payments, car ins, inspections, license tags and car maintenance expenses, birthday parties, school parties and school events, Christmas and other special days where gifts are expected.

Many times when I add up all the monthly expenses that the consumer has I advise them to not buy the max home they can afford, but instead to buy a home that fits their spending habits. It never goes over very well. They tell me that they don’t like those types of neighborhoods so they are willing to max out the loan qualification and gamble on everything going right for them.

Many FHA buyers ask for family down payment assistance that doesn’t have to be repaid.

Plus, a family of four who eats out all the time can spend $1500-$2000 per month. If they’re eating out all the time they’re eating themselves out of house and home.”

Not a very encouraging set of comments, but still food for thought. It’s a good point, consumer debt is again reaching mountainous proportions. If consumers don’t reign in spending somewhere, cracks will begin to form.

Whether or not FHA mortgages will come crumbling down remains to be seen. But something will have to give.

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