FHA is the new subprime

More precisely, FHA is the new put-option mortgage. As we said way back in January 2007 with Countrywide stock flying high around $40:
The mortgage industry calls them pay-option ARMs, because the buyer has the option to pay a full mortgage payment or a lot less. In reality, they are put-option ARMs, because the buyer is really getting a put option on the real estate market. If the market goes up, the buyer refinances or makes fully amortized payments on the loan. If the market goes down, the buyer makes minimal payments to live in a nice house for a period, and then hands the underwater house back to the lender. A no-lose proposition for the smart buyer!

Well, they're not ARMs any more. They are ridiculously low (~5%) 30-year fixed-rate loans. And the sucker is not a sleazy outfit like Countrywide. It's the FHA. That means you, the taxpayer.

A certain friend of ours (let's call him B.G. Cojones) was contemplating the purchase of a $700,000 property. Now ol' B.G., like most of us, realized that this economy is either going to tip into serious recession or inflation. And ol' B.G., like most of us, isn't certain which way it will go. So what B.G. wants is an inflation hedge with no downside. Real estate is a lovely inflation hedge, but that pesky 20% down payment is a bugger. Losing $140,000 in a severe recession would suck. So ol' B.G. went looking for alternative financing options, and here's what he found:

FHA loans up to $697,000
3.5% down payment
5.0% fixed for 30 years at 1 point
1.75% FHA fee + 0.55% annual mortgage insurance fee

This translates into a $12,000 fee and $300/month in exchange for keeping your extra $115,000 in cash. Plus you can roll the fee and the points into the loan so it's not cash out of pocket.

So if Bernanke's hyperinflation plan works, ol' B.G. gets a premium property for $25,000 down, and toward the back half of his mortgage, the payments are worth roughly the change you could shake out of your couch.

And if Bernanke's hyperinflation plan fails and real estate continues to fall, ol' B.G. hands the property back to the stupid FHA (i.e. stupid taxpayers).

Ain't government homeownership promotion grand?

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