Reminder: subprime mortgage lending is alive and well, thanks to the federal government:
According to Pinto, the FHA charges the same premium for all borrowers regardless of credit score. That allows the agency to use the premiums from more creditworthy borrowers to cover the losses from risky ones. It also masks to the borrower the true risk he undertakes in taking a loan.
And while on average it looks like the risk profile of the FHA’s lending has improved, about 40% of the borrowers in fiscal 2012 had a FICO score below 660 or a debt ratio above 50%. “Either of those would have been called subprime back in 2000,” Pinto notes. [Emph. added]
Recall too that the FHA requires down payments of as little as 3.5%. What could go wrong?