Loans insured by the Federal Housing Administration have allowed buyers with less than stellar credit to purchase with as little as 3.5% down. (In addition, most of the closing costs and fees can be included in the FHA backed loan.) After Congress extended NYC’s conforming loan limits to $729.8k, FHA loans have tripled, as have developments looking to FHA approval as a panacea to today’s prohibitively tight credit markets.
Buzz is forming, however, that the FHA may soon require a bailout of its own: 20% of FHA loans insured in 2008 and 24% of those in 2007 are now facing major problems. Since these loans are bundled into mortgage-backed securities then guaranteed by Ginnie Mae, the brunt of the issue may well fall again on the taxpayer. For now, get ready for an increase from 3.5% to 5% down for FHA backed loans (more stringent) and a decrease in the apartments sold threshold in a new development from 50% to 30% (less stringent). How’s that for confusing signaling?
{ 2 comments… read them below or add one }
Thank you Honeycrisp for giving me an avenue to comment about the FHA. While I know what the initals FHA are an acronym for, I have often thought it should stand for “Free Housing Association”. I am not going to say that the FHA doesn’t serve some good by giving borrowers access to funds to buy homes, which in turn keep the economy stimulated, albeit a somewhat false stimulation at best.
That being said, let’s take a look at the plights that a program such as the FHA manifests. I will preface this by saying I have been in lending for over 20+ years, but have been out of the home mortgage industry for many of those years. When you offer a program that allows a buyer to purchase a home with 3.5% down payment (we won’t even get into the gift for downpayment issues) and allow them to finance their closing costs including a 1.75% FHA upfront premium (1.75% insurance premium to cover the approximate 15% cost of foreclosure), I believe this is called 100% (or more) financing. The new and more “stringent” down payment guidelines of 5% versus 3.5% will at best make these loans 99-100% LTV.
There is an old saying in lending about having “skin in the game”, well even with the new stingent down payment guidelines,the best any FHA buyer has is in the game is their stratum corneum. This type of skin is made of dead, flat skin cells that shed about every 2 weeks (need I say anything more about the correlation).
If we went back to the 20% down payment requirements, would the major problems the FHA is experiencing decrease? There is one major bank that only is allowed to list 10% of their foreclosures for sale, so the market won’t be flooded with foreclosed homes in this certain southwest town that’s capital is named after a mythological bird.
My final thought for this posting is if the FHA is facing major problems with 20% of the 1.7 million and 24% of the roughly 1.0 million loans they “backed” in 2007 and 2008 respectively and now want a bailout from the taxpayers to cover them, what will they ask for next year for the 3 million loans for the year 2009? The dollar amount of FHA loans “insured” for 2007 according to the information I found was: $120 billion in 2007, $429 billion in 2008, and is projected to be $627 billion in 2009. If you add the three years totals together it is over $1.1 trillion.
If on average 22% of those face major problems as they describe it, that would be $259 billion in problem FHA loans. How much will this end up costing the taxpayers in a bailout situation? The answer is about $850 per person living in the US or $1,900 per US taxpayer. The other option would be to ask Warren Buffet or Bill Gates to give the FHA basically their entire net worth to bailout the 15% foreclosure costs of these $259 billion in problem loans for the last three years.
Scott — thank you for a truly thought-provoking comment. In recent discussion with a fellow Apple reader, the fantastic point was made that investing in real estate over the last several decades was basically investing in the government’s will to maintain a policy of encouraging homeownership in every which way possible.
Today, many are asking themselves how far the government is willing to go to subsizide home ownership via multiple channels: the FHA, first time home buyer credit, tax writeoffs, etc. Indeed, while the public sentiment may have just begun to shift in terms of redefining the components of the “American dream”, the government’s does not appear to have done so. Further, as you mention, the likelihood that Americans will need to co-subsidize this dream via a bailout with their own tax dollars seems material.
For those bullish buyers looking for a reason to buy in, they see the government continuing their “home ownership subsidies” as a big positive. From a societal engineering standpoint, this policy is particularly helpful in trying to close the ever-widening gap between the haves and the have nots, and making the dream “attainable” across all socio-economic classes. For those potential buyers who are bearish, however, they see this policy as faulty at best, and unsustainable over the long haul.