Lew Ranieri was quoted yesterday by Calculated Risk as stating that "as much as 50 percent of (subprime) production could have gone to the agencies, meaning, Fannie, Freddie and FHA" over the last five or six quarters. Ranieri, who is credited as the father of mortgage securitization, seems to believe that the subprime "mess" is a symptom of a broken MBS system.
Without knowing where Ranieri is getting his data, the comment still provocatively gut-checks to origination insiders. But why? Both Fannie and Freddie have psuedo subprime programs that will qualify lower FICO borrowers with only modest rate premiums. FHA programs have always allowed for borrowers with expanded FICOs.
Focusing on mortgage broker production (which makes up the lion share of US residential loan production), the issue was more one of accessibility and ease of process than necessarily one of pure greed.
Subprime lenders such as Option One, New Century, Argent had a cadre of Account Executives pushing products that granted almost instant approval and no documentation requirements. A process that could take months via an FHA product. Yet the FHA loan will drive an affordable product to the consumer, priced substantially lower, making it a win-win for both parties if it weren't for the unnecessary obstacles: minimum loan amount, broker approval.
The agency subprime products are also less possible for similar reasons. Although they have less process hurdles than the FHA product, the pricing is still not significantly better enough to justify the extra effort.
The focus on enhancing FHA is long overdue. According to NAMB testimony, 38.6% of all FHA loans were originated by mortgage brokers. However, they state that prohibitive audit and net worth requirements for mortgage brokers substantially reduce public access to this product, as many mortgage brokers are unable or unwilling to offer the product as a result of HUD hurdles and hassle.