FHA mortgages can hurt low-risk borrowers, critics say

Mortgages insured by the Federal Housing Administration are often the only port of call for borrowers who can’t afford a hefty down payment, but critics say that the FHA mortgages come with high premiums that exploit these borrowers.

If the economy were to slide back into a recession, said Edward Pinto, a fellow of the American Enterprise Institute, the majority of FHA loans would be at high risk of default. And since the FHA prices all the loans equally, borrowers have no barometer to gauge the relative riskiness of their loans.

Sign Up for the undefined Newsletter

In fact, Pinto told the New York Times, the low-risk borrowers would probably be better off getting a loan from the private sector, as the FHA is effectively overcharging them to subsidize the higher-risk borrowers. “They may assume that the government is protecting their interests,” Pinto said.

FHA-backed loans offer first-time buyers a down payment of as little as 3.5 percent, compared to a minimum of 5 percent for loans backed by Fannie Mae, according to the Times. But the premiums on FHA loans are considerably higher, the newspaper said.

Borrowers would be well-served if the FHA shifted to risk-based pricing, suggested Michael Lea of the Corky McMillin Center for Real Estate at San Diego State University. And the FHA should inform borrowers of the difference in insurance costs for FHA and Fannie Mae loans, Lea told the Times. [NYT]  – Hiten Samtani