Sunday, June 29, 2008

FHA Bill: "It’s not enough"

I talked about the FHA bill earlier but as it matures and grows as part of a bigger bill the fact that it just won't do very much is becoming clearer. From the NY Times:
“It’s not enough, even in the best of circumstances,” said Mark Zandi
Representative Barney Frank, Democrat of Massachusetts and a central force behind the legislation, said on Friday that recent reports about falling home prices have rallied support for the plan. But he acknowledged that the plan may not do enough to help homeowners or the housing market. Mr. Frank, chairman of the House Financial Services Committee, said that even after a bill like this, “you may need more.”

FHA qualifications, as loose as they are, are still very tight relative to the boom years. The number of people both able and willing to qualify is relatively small and the number of servicers willing to write down large portions of debt and risk their reputation and legal challenges with their investors is a huge unknown. I think the places where the servicer would voluntarily write down the loan amount such a large amount are parts of Florida, Detroit and Central California where the housing situation is extremely depressed. This would be a way for lenders to rid themselves of a large amount of low priced inventory very quickly. Since the costs of holding and selling are a much bigger percentage of the loan balance these low cost places with huge inventory overhangs will be the beneficiaries of this action. More expensive areas closer into cities (IMHO) will still go the traditional loan mod or foreclosure route.

There are other parts of the bill that are handouts (credits for buying homes) and bailouts (allowing more liberal tax write offs home builders and financial institutions) but the FHA portion of this bill isn't one of them.

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