Credit Suisse Group is hoping to convince the federal government to allow for the refinancing on 600,000 mostly delinquent subprime loans into FHA loans. Meanwhile, J.P.Morgan Chase is working on a similar plan. The Treasury Department is skeptical of plans such as these that could expose taxpayers to losses and bailout lenders.
I find proposals such as these very disturbing to say the least. In the past FHA has financed homes for worthy borrowers who make reasonable down payments and have earned good credit. FHA charges 1/2% per year to insure the loans. We are currently experiencing a downward spiral in home prices in many areas of the U.S. Many of these subprime borrowers never put money down on their homes and have shabby credit. Let's say that FHA does agree to refinance 600,000 of these loans. A lot can happen in coming years. How many of these new FHA loans are going to go into default? My worry is that this 1/2% charge for mortgage insurance may not cover all of these foreclosures.
It has now become socially acceptable and trendy for borrowers to walk away from upside down mortgages and use jingle mail to return their keys to lenders. Prices may very well continue their downward spiral leaving homeowners very little financial justification to continue house payments. We simply should not have to pay taxes to subsidize irresponsible homeowners and bankers.
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