The government is not guaranteeing these loans with government funds. FHA is basically a nonprofit mortgage insurance company. Lenders and borrowers pay premiums for the loans to be insured against default. The FHA insurance fund has never run a deficit and in fact usually runs a surplus that helps HUD meet its budget. It does not insure crazy loans like 2/28 ARMs and does not allow lending on stated income. The FHA is conservative about paying claims and is a vigorous regulator of its approved lenders. Lenders that submit fraudulent claims or failed to follow FHA guidelines when originating the loians can have their claims denied and can be disbarred from the program. It’s actuially a pretty good model for how the mortgage business ought to run going forward.
Is there any question that will change?...I would not be at all surprised if the reforms Dodd is talking about will dramatically loosen standards for FHA loans...to address the plight of all these poor souls who were "tricked" into taking nothing down, interest only loans from private lenders of course