Can’t we learn from our mistakes?

Can’t we learn from our mistakes?

Recently I received an offer for a multi family property that I was selling in Bridgeport Connecticut. The offer included a pre approval letter with 3.5% cash down, guaranteed by the FHA.

At the time I thought to myself that this can’t possibly be a valid offer due to the low down payment. If the market goes down a mere 3.5% the buyer would be under water with no equity in the property, not a good situation.

On research and conversation with the financial institution that was prepared to make the loan, I discovered that this loan was valid and would be guaranteed by the FHA Federal Housing Authority.

The guidelines that you can see at FHA.com are made by mortgage, savings and loan or bank and insured by FHA include primary residence, 1,2,3 or4 family home with a minimum of 3.5% down. The mortgage can be fixer upper or reverse mortgage as well as house in good shape.

Although the FHA has made these loans harder to get, increased premiums for people with a low credit score and allowed less to be used for closing costs, these loans are ultimately backed by the US tax payer.

With foreclosures rising 75% in metro areas in first half 2010, lack of jobs and the FHA’s financial reserve way below what is mandated by Congress, this is another house of cards.

This loan guarantee program sounds very much like what got us into the financial mess that started in 2008 in the first place.

Can’t we learn from our mistakes? Its common knowledge that the recent financial crisis was caused by the Federal Government insisting that financial institutions loan money to people to buy houses that they couldn’t afford. The loans required very little down payment and did not require documentation of earnings. These bad loans were packaged through a financial process called securitization and sold to investors. When the people defaulted on the underlying mortgages the securities were devalued and the banks had bad investments on their books.

This caused the financial crisis of 2008, a market sell off, a lack of confidence, a down turn in the economy and numerous miss guided financial stimulus packages sponsored by the Democratic controlled congress while George Bush was still in office, TARP which was designed to get the bad assets off the ban’s books and the Democratic sweep in 2008 which made things worse through the huge spending binge, specter of higher taxes and an enormous amount of new, business stifling regulations.

Stephen Reilly
Realtor
swreilly@swreilly.com
203-246-7372