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The profit margins for those originating subprime FHA mortgages are three or four times as large as those on other mortgages because the borrowers view themselves as dependent on the originator who solicited them. And they are right — mainstream lenders will reject them. Subprime FHA lenders are largely shielded from competition.

FHA loans with very low down payments to borrowers with very low credit scores have very high default rates. Who are these lenders willing to make FHA loans that carry high default risk? As far as I can determine, they fall into two groups. One group intends to make enough money before they are bounced from the program — which could be some years — to make it worth their while.

A second group will make the occasional high-risk FHA as an accommodation to a referral source, such as a real estate agent or a mortgage broker. The purpose is to encourage the referral source to send them more quality loans. If such lenders keep the number of high-risk FHAs to a small share of the total, they don’t endanger their accreditation with FHA.

The FHA subprime market results in higher losses to FHA, and allows the most vulnerable borrowers to be overcharged. These borrowers should pay more, but the payments should go to FHA to defray the higher loss rates, not to loan originators. The appropriate remedy is to scale mortgage insurance premiums to credit score.

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