FHA critics warn of second housing bubble

The Federal Housing Administration and President Barack Obama’s plan to jump-start the housing market has led to historically low interest rates of 3.75 percent on 30-year mortgages, but critics of the policy warn that the FHA’s easy lending may lead to a second housing-bubble, the Fiscal Times reported.

With banks not lending, the FHA’s lower interest mortgages were designed to encourage buyers. But banks, such as, Merrill Lynch/Bank of America are concerned that the FHA is merely recreating conditions that led to the housing crisis by offering loans to under-qualified applicants.

BofA points to a report released recently by the Treasury Department showing that almost half of the FHA’s modified loans defaulted within a year versus 27 percent of Fanny Mae and Freddie Mac loans. Furthermore, FHA loans ask for down payments as low as 3.5 percent of the poperty’s value, making it easy for borrowers to walk away from houses under economic distress.

Carol Galante, FHA commissioner, defended the government’s strategy, saying, “Since the crisis, post-bursting of the bubble, we have seen our borrower profile improve, actually. The average credit score [for FHA borrowers] is about 700. Pre-crisis it was more in the 640 range.” [Fiscal Times]