While I applaud the FHA’s attempts at avoiding a taxpayer bailout, their efforts will unfortunately not work and us taxpayers will be left on the hook. Here is the details of the new FHA lending fees that in theory should help the FHA stay solvent - [1] Federal Housing Administration to raise fees - Yahoo Finance

The primary problem with the subprime mess was/is insufficient equity on the borrowers’ part. Sure, many borrowers ended up not being able to pay the monthly mortgage payments when the teaser rate ARMs reset. But, the more interesting (i.e. scary) situation is when borrowers who can pay their monthly mortgage perform a “strategic default” and decide to just walk away instead of paying on a property that is way underwater. This is precisely what is happening right now.

Congress created the FHA in 1934 to help the housing industry recover from the Great Depression. At that time, the US consisted primarily of renters as lenders would only lend up to 50% of the value of the property. The FHA stepped in to insure mortgages that were created with a higher LTV ratio, thus enabling more people to buy property.  Today, you can get an FHA loan insured with only 3.5% down!

Therein lies the problem…what happens when the property value falls 20%? (a modest decline compared to many areas today) The borrower is now paying a mortgage that is worth 17% percent more than the property! Why not just walk away and rent for a year or two. Then go buy a new place at a cheaper price! Sure, you may have a little harder time qualifying the second time around, but with all the current foreclosure, I guarantee lenders won’t ding you as much as they used to for this being on your credit history.

My prediction - the FHA will have to be bailed out by taxpayers in the near future, even with these fee increases. Oh, did I mention that their “fees” can be rolled up into your mortgage?! Brilliant!