Suze Orman is wrong, FHA loans a viable option for some borrowers
March 20, 2011 11:04 PM
Some talking heads are attached to bodies just a bit too far removed from the playing field. How can they call good plays, when they aren’t even close to the game?
This thought occurred to me as I watched Larry Kudlow interview Suze Orman last week, about her new book “The Money Class.” I understand Ms Orman wants to sell her book, and calling the “American Dream dead” will certainly get people’s attention. But, I believe she is doing some hard working families with good credit a disservice.
The American dream of owning a family home was a good one, it only turned nightmarish when standards and loan types were loosened to the point of absurdity. As discussed in earlier columns, those standards have now tightened, toxic loan programs are dead, and, naturally, fewer people will qualify to own a home.
But, Ms Orman’s call that ANYBODY buying a home utilizing the FHA program with only 3.5% down payment is engaging in “The worst economic decision a person will make,” is an example of a talking head making a call on a play while too far from the field. To say that NOBODY should use the FHA program is draconian, even condescending.
Up until the financial crisis of 2008, FHA loans were a small percentage of the total loans extended in the United States. In fact, our company gave up its FHA license in the late 90’s because the demand for FHA loans didn’t justify the cost of keeping it.
However, the financial collapse of 2008 shifted the ground under everyone’s feet, and we quickly realized that staying in business as a mortgage broker would require rapid adjustment and adaptation to a whole new world. Part of that change included a rise in numbers of buyers who could qualify for an FHA loan and no other. Recognizing that, we reinstated our FHA license.
While FHA loans were previously less than 5% of the market, that number has now risen to above 30%. These loans represent a stable force in the residential housing purchase market.
Should FHA loans continue to represent more than 30% of all residential loans in the country and all borrowers, even if they are qualified for FHA loans, get them? Absolutely not to both questions. But, there are some who should.
Clearly, the lack of “skin in the game” which is what a small down payment represents, may lead to a greater likelihood of a default. Secondly, a loan which requires only 3.5% down payment may encourage buyers, inadvertently or not, to stretch beyond their real means and buy more house than they can realistically afford. Neither scenario is good and I assume it is to this that Ms Orman speaks.
But these problems can be addressed. First, the financial health, or quality, of the borrower should be higher than that required for a conventional loan. To that end, the FHA has raised it’s FICO score limit and made other changes which eliminated creative programs for down payments.
There are further changes I would recommend. FHA would be wise to eliminate the exception rule, which would prevent anyone with over a 43% debt to income ratio from purchasing a home. Also, adding non occupant borrowers to the loan is something I have never been a huge fan of. If an occupant borrow can’t qualify for a loan with his or her own income they should not be taking out an FHA loan with only 3.5%.
Clearly, then, there are means tests to eliminate many potential FHA borrowers.
But, is Ms Orman correct in advising EVERYONE to consider FHA loans financial Armageddon? No!
There are benefits of an FHA loan in this market when it’s made to the right borrower. And there are reasons otherwise good candidates for a home loan do not have the requisite, according to Ms Orman, 20 % down payment.
Borrowers for whom I have secured an FHA loan have, on average, a fico score above 760, a debt to income ratio in the high 20 low to mid 30’s, and dual incomes which total to a range of $150,000-$300,000.
What they don’t have is the 20% down payment. Home prices would have to come down another 20 – 40 % for them to come close to having 20% down. Sidelining these borrowers until this happens isn’t good for the market, or good for them.
But Larry Kudlow and Suzie Orman would tell them they shouldn’t buy a home until they have saved that 20 per cent. How long might that take?
Because these borrowers are financially responsible, they are setting aside money each month toward retirement, for college tuition, and into emergency savings of 6 – 12 months reserves. Ironically, this smart planning also means by the time they have saved for a down payment, their family is grown and gone.
An FHA loan would enable them to meet all their financial responsibilities, and also buy the home they want.
Is it a risk for these borrowers, and others like them, to jump in now and buy their house with a 3.5% down payment? Of course it is. Clearly, the recent debacle in the housing market, in which even a scarecrow might have been given a loan, has taught a lesson about foolhardy risk. Any financial investment is a risk, for the right borrower the FHA loan does make sense. Currently, the program enables solidly middle class American families, with fully documented income, assets and great credit scores, to buy their family home now. To take that chance away would be a shame.
In one of Ms Orman’s interviews about her book she said that she wants to see Americans “live a life that they deserve to live. Not a life that’s full of misery, riddled with fear. A realistic life so that they can eventually live the dream they want to live.”
I agree Ms Orman! But, my perspective from the actual field of play gives me a clearer picture of what that means. In some cases, it means the exact opposite of what Ms Orman said. Sometimes, living that dream is best served with an FHA loan.
Logan Mohtashami is a senior loan officer in his family run Mortgage
Company, AMC Lending Group, which has been providing mortgage services for
California residents since 1987. LoganMohtashami.com