FHA subprime lending about to blow up on the taxpayer

We noted back in April that FHA is the new subprime. Yes, your government is making near-zero-down loans of up to $729,750 for luxury homes to people with borderline income and credit scores and minimal assets.

In my neighborhood (and in most higher-end neighborhoods, I suspect), the FHA is dominating the market. Any decent homes priced within the FHA loan limits are snapped up quickly as buyers realize that it's a massively valuable free option on inflation. If Bernanke's money-printing brings about inflation, you get a huge leveraged bet on real estate, which will make you rich. And if the housing market keeps sinking, you retain the option to stop paying your mortgage, live rent-free for a year or so, and then walk away with no money lost. The FHA (i.e. the taxpayer) is then on the hook for your underwater house.

In the price range just above the FHA loan limits, say where you'd have to put down 20% actual down payment on top of the maximum loan, some sales are happening. But above that range, it's a dead zone. Absolutely nobody is buying houses above that range with real money or real, non-government subsidized loans.

The Wall Street Journal yesterday reported that the FHA is highly likely to implode:
"They're probably going to need a bailout at some point because they're making loans in a riskier environment," says Edward Pinto, a mortgage-industry consultant and former chief credit officer at Fannie Mae. "...I've never seen an entity successfully outrun a situation like this."

How does it feel in small-town America to know that you are subsidizing Californian speculators' purchases of $750,000 properties, and that if it goes wrong, they'll walk away and leave you holding the bag?

Me, I'm playing the game by the rules the politicians have set. I'm looking for a nice house I can buy with a near-zero-down FHA loan. If prices keep dropping, that's your problem, not mine. If you don't like that, you might want to look into how much your Congressperson received in donations from the National Association of Realtors.

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