FHA Subsidizing Very Practices That Got Us Into This Mess

The reason we got into this housing mess is that the government massively intervened into the mortgage market to make it easier for people who would not otherwise qualify to find a mortgage.

Low downpayments have always been a sign of significantly increased foreclosure risk. It's easier to walk away from a home if you haven't put much of your money down on it.

People who flip homes are also dramatically more likely to default on a mortgage than those who live in such homes.

The LA Times says:

The federal government hopes simultaneously to help low-down-payment home buyers, investors who fix up foreclosures, and local communities burdened with too many bank-owned and foreclosed homes — all with one potentially far-reaching policy change.

The Federal Housing Administration is revising its long-standing "anti-flipping" rule starting Monday and just might score a hit with all three target groups.

For years the FHA has had a strict prohibition: It wouldn't insure a mortgage on a house whose seller had owned it less than 90 days. The ban was a reaction to fraudulent quick flips of houses that inflated their values far beyond true market worth.

The flips often were pure cons: Buyer A would acquire a low-cost house in bad repair, do minor cosmetic changes and resell within days to Buyer B, who was also part of the scheme, at a significantly higher price. The sequence could involve a string of serial flippers within a month or two, and trumped-up prices spiraling upward.