One Phoenix conference speaker expressed shock that Shaun Donovan, the secretary of Housing and Urban Development, which runs the FHA, has referred to these low down-payment mortgages to recently failed borrowers as “plain vanilla” loans that can be made safely.
Most of those loans are passing through the FHA and Veterans Administration before getting packaged into mortgage bonds by Ginnie Mae, the government-backed guarantor behind FHA and VA loans.
“There’s a lot of credit risk” from these mortgages, Anand Bhattacharya, a finance professor at Arizona State University and mortgage expert (who spoke on a panel I moderated) told me. “It’s sort of the new subprime. If you looked at the average credit profile of these [FHA and VA] borrowers, it's worse than subprime.”
The mortgage risk specialists at the conference also sat through a session about how the federal government has been going after home lenders over discrimination claims with unprecedented vigor since 2010, when the Department of Justice appointed a Fair Lending Task Force.
Bolstered by the theory of “disparate impact,” the DOJ and other federal agencies are prosecuting lenders over statistical analyses indicating that, even if they had no intention of discriminating, their business practices have resulted in more loans going to some groups than to others.
Lenders were cautioned that it's futile to resort to the insanity defense – in this case meaning to argue that the law's insane (a prospect that the Supreme Court will take up later this year). Instead, they were advised to hire or appoint fair lending officers and do their own statistical analyses before the feds come knocking. If the results are unfavorable, the antidote, presumably, is to balance things out by lending to members of specific ethnic groups — even if that means running afoul of all those rules and regulations about qualified mortgage standards, zero defects and the like.
Confused? Exasperated? You'll feel even worse if, as is entirely possible, you're financially responsible but have a hard time getting a mortgage as a result of this regime. Or if taxpayers end up on the hook for another subprime mortgage mess. Or both. Who is pushing sub prime mortgages?