(This is Part 5 of a five-part series. See Part 1, Part 2, Part 3 and Part 4.) Previous articles in this series emphasized that the subprime market remains open for business, with more realistic underwriting rules than before the house-price bubble broke. Hopefully, ill-advised actions by government won't shut it down before something better is in place. The Federal Housing Administration, or FHA, is the only plausible substitute. But converting FHA into a viable substitute for the subprime market requires a number of far-reaching changes. Risk-Based Pricing: A core feature of the subprime market is risk-based pricing over a very wide range. On the price sheet of a typical subprime lender, the interest rate on the worst risk is 7-8 percent higher than the rate on the best risk. For FHA to ...
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