FHA Gravy and The Threat to TaxpayersNow that the subprime market is temporarily dead, FHA loans have become, in some respects, the "new subprime," with borrowers making down payments as low as 3.5%, and qualifying for lower rates than conventional borrowers. At TD Bank, a division of Toronto-Dominion Bank ( TD - Get Report), for example, the best rate listed on its Web site for a qualified borrower taking a conventional 30-year fixed-rate mortgage, making a 20% down payment and paying no discount points, is 5.125%. For an FHA borrower making a down payment of 3.5%, the rate is 4.75%. For an FHA borrower qualified for the "low to moderate income rate," the quoted rate is 4.25%. FHA borrowers pay for government loan insurance that protects the lender, called a mortgage insurance premium, or MIP. The up-front MIP is 2.25%, and the borrower pays an additional annual MIP of 0.55%, which is based on the average loan balance after being fixed for the first five years.
- Conventional: The borrower will put down a $40,000 down payment and pay a total of $160,018 in interests and fees over the life of the loan.
- FHA: The borrower only has to put down $7,000, so the base loan amount is $193,000. Assuming the up-front FHA mortgage insurance premium (MIP) of $4,342 is financed, the total loan amount will be $197,342. Total interest and fees over the life of the loan will be $179,883, plus an additional monthly MIP payment of $88.46, which will begin declining after five years.
- FHA Low to Moderate: Same initial loan balance as a regular FHA loan: $197,342. At an even-lower rate 4.25%, the total cost of interest and fees over the life of the loan will be $158,778, plus the additional monthly MIP payment of $88.46, which will begin declining after five years.
Political Heat, Consequences and the Next BubbleDuring the years leading up to the real estate bubble, legislators pressured Fannie and Freddie to lower their underwriting standards, so community banks could make more loans and more consumers could achieve the holy grail of home ownership. This continual easing of credit certainly helped more people buy homes, but eventually got out of hand as home prices exploded and speculation became rampant.
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