Although FHA was a creative mortgage program designed by the federal government to increase home ownership among hard working, low-to-moderate income people desirous of home ownership, the program worked well because it was, and still is a federally insured loan and as such protected mortgage loan lenders from loss due to delinquency and subsequent mortgage foreclosure. The VA mortgage loan worked because the Veteran’s Administration (a different arm of the federal government) guaranteed mortgage loan lenders against loss due to mortgage foreclosure, so this was an even more protective blanket for the lender; The federal government, through the Veteran’s Administration, Guaranteed repayment!
The only mortgage type that deviated from the conventional mortgage loan guidelines and was not insured or guaranteed by the federal government or fully insured by the conventional mortgage bank was the PMI (Private Mortgage Insurance) program, and although PMI mortgages met a need in the real estate financing marketplace, there were those who viewed this mortgage type as a model of even more creativity in real estate financing. Soon there were mortgage programs introduced that required 5% down but only 3% of the buyer’s own money; 10% requiring no PMI; 5% down no PMI as long as the home buyer agreed to a small second mortgage (“piggy-back second”); And a number of different variations and new combinations.
Then there was a new term introduced to describe these newly created non-conventional, non-FHA, non-VA, non-PMI mortgage types. The term was Sub prime mortgage or Sub prime mortgage loan! As it turned out the Sub prime mortgage loan was the among most reckless kind of creative real estate financing loans to have been introduced to the modern-day marketplace, and – we now know – was responsible for an almost collapse of our financial system (resulting a recession lasting from late 2007 to late 2010) and near depression.
In hindsight, one can safely conclude that creative real estate financing, when properly insured, was least likely to lead to a mortgage crises. Contrary to several reports during the sub prime melt down, the FHA-insured mortgage loan was not responsible for the 2008 mortgage crises and market melt down; And the VA-guaranteed loan program certainly was not considered the culprit. The PMI mortgage provided insurance to protect conventional mortgage lenders for loan amounts over 80% and up to 95% of the lesser of a home’s purchase price and its appraised value, a clear indication that when lenders’ interests were insured the exposure to loss was greatly reduced.
When there was little or no insurance lenders were opened to huge losses, and when those losses were compounded, many lenders sought help from their rich Uncle Sam and received it via the many $Billions in bail-outs towards the end of 2008. So what purpose did such recklessly creative real estate financing, technically fraudulent-inducing sub prime mortgage types serve? What was the end game? The truthful answer to that question has yet to be determined, and may not be for years to come.
A message to Prime Mortgages readers:
Thank you for the support you have shown. We will continue working to provide the most relevant and useful information about current FHA-insured programs and related topics. Please provide any comments, opinions or preferences which you would like us to be aware of. Thanks and God Bless!
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If the government can’t run business, how come businesses always run to the government for a bailout when it runs into trouble? FHA-insured mortgages, government run for 75 years. Lest we forget?