Think subprime mortgages have gone away? Think again, we have one lurking within FHA, with features that are eerily similar to those of the private market that went into hyper-drive in the 2000s, and collapsed in 2007.

The central features of a subprime market are:

• Expensive marketing directed to borrowers with very poor credentials and few options.
• Liberal qualification requirements that allow some of these weak borrowers to be approved.
• Overcharges, with profit margins much higher than those available on other mortgages.
• High default rates.

Expensive marketing: The techniques used in the two recent subprime markets to target potential customers are the same. A letter I received recently described “an event sponsored by a real estate company/mortgage company to help people that have had a foreclosure or short sale get back into a house. We did a short sale on our house about two years ago. While there our qualifications were checked, and a few days later they approved us.” The approval was for an FHA. Other than that, this letter could have been written 10 years ago.

Liberal qualification requirements: The private subprime market depended on the substantial liberalization of underwriting requirements that arose out of the housing bubble during 2000-2007. The prevailing assumption was that rising house prices would convert the otherwise weak subprime loans into good loans — which they did, until the bubble burst, at which point the default rate ballooned.