Here is the January 2009 Loan To Value chart for Ventura County. If you click and enlarge the chart it basically shows how much people are putting down at different price points. A dot at 80.0 and $300,000 means that a borrower put 20% down on a $300,000 place. This gives us a feel for how people (down payments, monthly payments and loan type) are getting into the market and where (sale price) they are getting into the market.
For jumbo conforming it is getting very difficult to get PMI. So FHA is the only option for loans with less than 20% down. For conforming loans it is getting difficult to get PMI above 90% LTV and this is where we see the rampant FHA activity. The Jumbo conforming loan limit was about to drop from 729k to 625k and many lenders were phasing it out by November. The jumbo conforming limit is back to 729k this year but its effect was marginal on the market to begin with.
For jumbo conforming it is getting very difficult to get PMI. So FHA is the only option for loans with less than 20% down. For conforming loans it is getting difficult to get PMI above 90% LTV and this is where we see the rampant FHA activity. The Jumbo conforming loan limit was about to drop from 729k to 625k and many lenders were phasing it out by November. The jumbo conforming limit is back to 729k this year but its effect was marginal on the market to begin with.
For people in the market right now if you go to the left hand side and look and find around the price at which you are thinking of buying and then you can go to the right and see what your competition has done as far as down payments and loan types.
The FHA loans at the higher price ranges are, in my opinion, very risky. FHA used to be for low income people and were underwritten with lower DTI ratios. Now they are used somewhat by high income people at higher income ratios, their prospect of higher income is low and lower income is high. I think this will affect the higher end move up markets as the people who rushed to buy have little to no equity for many years. I think this is true of FHA used in massive quantities in the market like we have now (currently running 37.8% according to Dataquick). With little down it will take that much longer to buildup significant equity and long term move up and relocation transactions in the market should stay low.
Note: I have added a foreclosure research link to the site, see here.
14 comments:
I've been watching with alarm the number of 97% purchases. At current trend they will take 5 months to be visibly underwater. We are setting ourselves up for a massive second wave of foreclosures.
With PMI getting scarce you basically have 20% down or 3.5% down and little in between. The dichotomy is scary.
At the risk of sounding "classist" I'm sure you know as well as I that the people with 3.5% FHA and banking on their $8,000 assistance are extraordinarily exposed to economic disruptions. They don't have to be Working at Bank of america Home Loans (nee Countrywide) to be exposed to rising unemployment in the county. We'll all be holding our breath for the next 6 months.
I still need a small orchard as a tax deduction. ;-)
I think you may be missing the point here.
At 3.5% down, price is irrelevant. With such a minimal down, buyers can use any extra cash beyond the 3.5% to bid up the home prices. I am already seeing this behavior in the Thousand Oaks area.
This serves to keep prices high - which is why the FHA doing this aggressive financing.
In my opinion, the time to buy was last fall - high inventory, relatively low interest rates, a dearth of financing options (this was pre-FHA), and scared sellers.
Now what you have is free flowing FHA financing, extremely low inventory, hardly any foreclosures, and no new construction. It all adds up to aggressive buyers and rising prices.
"At 3.5% down, price is irrelevant. With such a minimal down, buyers can use any extra cash beyond the 3.5% to bid up the home prices."
Huh? You are saying they have something greater than 3.5% down and are using that extra money some other way than down payment to bid up home prices? How does that work exactly?
"In my opinion, the time to buy was last fall - high inventory, relatively low interest rates, a dearth of financing options (this was pre-FHA), and scared sellers."
FHA underwriting got loose during the boom but has been tightened lately (down went from 3% to 3.5% many lenders added in FICO overlay, etc). Pre-FHA you'd have to go awfully far back and I doubt you were alive during pre-FHA much less knowing their underwriting guidelines.
btw, the "price is irrelevant" thing is soooo 2005. Price is always relevant if you plan on paying off the loan someday. Price is relevant because you have to qualify for the loan, unlike the boom years.
Price is relevant because you have to qualify for the loan, unlike the boom years.The point is, if I want to buy a $500,000 3+2 SFR I only need $17,500 down with FHA. I only need another $875 to bid that price up to $525,000 - if my lender required 20% down, I would need another $5,000, not $875.
FHA will lend up to 50% back-end DTI with documentation - it used to be 40%. All I need is about $80,000 in annual gross income to qualify for a $506,625 loan. In a two-income society that is easy to come by. I may have to pay points to get the 3.5% deal, but that's where my "extra cash" comes in.
No other lender on the planet would do that deal, but the FHA is doing it every day - they are feeding the bubble. Why else were FHA financed deals less than 5% of transactions 18 months ago and now they are over 40% in SoCal, heading for 50%?
The buyers using FHA today are buying an option on home price appreciation, just like in 2005. The price goes up, you cash in, price goes down you stiff Uncle Sam with the downside.
It's 2005 all over again.....
"FHA will lend up to 50% back-end DTI with documentation - it used to be 40%. All I need is about $80,000 in annual gross income to qualify for a $506,625 loan. "
FHA has a front end ratio as well... FHA current guidelines are at 31 front/43 back
For someone to qualify for a $500,000 loan at 4.875% interest rates they will need about $130,000 in income.
Some ratios can be moved a bit with significant compensating factors but the lenders have to worry about the default rates and being dropped by FHA if they push the envelope too far.
Tell me one major lender you know that is underwriting borrowers making 80k with 3.5% down for a 500k loan.
"The buyers using FHA today are buying an option on home price appreciation, just like in 2005. The price goes up, you cash in, price goes down you stiff Uncle Sam with the downside."
It's an amortizing loan with full documentation of income and a up front mortgage insurance premium and monthly premiums. Hardly the 80/20 IO loan or neg am loan of the boom years. Even the modicum of down payment offers some protection.
Anyone expecting appreciation is going to be sorely disapointed. What happens to this market after the Fed stops buying MBS and rates go back to 6%? What about a more historically normal 7.5%? People are buying today based on monthly payment alone.
"It's 2005 all over again....."
Sales are awfully low for it to be a frenzy. The lack of inventory isn't caused by this massive surge in demand. Demand has definitely increased due to the artificially low interest rates and the tax credit but not to even historically normal levels. Inventory is just being held off by the foreclosure moratoriums and owners waiting to see if they get bailed out instead of dealing with their reality. The lack of inventory is the story not the modest increase in demand.
"I only need another $875 to bid that price up to $525,000 "
p.s. Don't forget the extra $6,500 in income you'd have to prove in order to bid up the property. It isn't just about the down payment.
With sales commissions at 6% the 3.5% down payments is a quick trip to a future walk away and foreclosure. Short sales far into the future and finally a complete dump per Japan were the burbs after an initial 30% down had a dead cat bounce then dropped another 50% in value.
Anon pointed out that the government via FHA is spiking the market along with the FED which is true but one also need to understand that the size of the mortgage debt market has gone from around 5 trillion to 12 trillion in 6 years!!! What has collapsed is the ability to provide liquidity to the RE mortgage debt market given its size. The government is the only outlet for a debt market of this size, given the fact the FED has to do QE along with FHA government financing should be a huge red flag.
The reality is that the banking system will not be able to fund the super sized mortgage debt market nor will the government and FED be able to spike the market without larger and larger risk premiums which means the debt market will have to shrink via default.
What happens to this market after the Fed stops buying MBS and rates go back to 6%?That is not gonna happen any time soon, they own the printing presses.
....but the lenders have to worry about the default rates and being dropped by FHA if they push the envelope too far. I seriously doubt the lenders doing FHA financing are worried about defaults, that is the FHA's (and you and I as taxpayers) problem. The lenders worry about their commissions.
With sales commissions at 6% the 3.5% down payments is a quick trip to a future walk away and foreclosure. If the FHA was worried about walk-away's they wouldn't be doing these deals. There is a reason FHA is the only program making these loans, and it's not based on common sense or safe lending practices.
I'm not saying any of these actions by our government makes sense, in fact they don't. But I understand what they are up to and anyone expecting a change in what they are doing is going to be waiting a long time.
"That is not gonna happen any time soon, they own the printing presses."
First, No response to the front-end ratio stuff? No 500k loans for a 80k earner response?
The Fed does own the printing press, the problem becomes if they keep using it nobody will want to buy MBS and they will have to replace all of the MBS demand instead of getting away with the small part of demand they are replacing now. They don't get a free pass on this forever. Low rates and quantative easing means anyone buying a MBS is underperforming inflation. Bond holders will find other places for their money. That isn't something the Fed can risk, they do have to strike a balance.
"I seriously doubt the lenders doing FHA financing are worried about defaults, that is the FHA's (and you and I as taxpayers) problem. The lenders worry about their commissions."
You do realize if a lender has higher than normal defaults FHA will no longer insure their loans right? FHA is merely insurance, the banks are getting insurance on money they are lending. Do you not worry about crashing your car because you have insurance? No, you try not to wreck your car because insurance is no substitute for not getting in a wreck in the first place.
I think the FHA is far too loose as far as underwriting but it is way tighter than anything going on during the boom. Just look at the LTV chart, look at the FHA loans. Vast majority under 400k, it isn't like people have pricing power who use FHA loans.
First, No response to the front-end ratio stuff? No 500k loans for a 80k earner response? My understanding is that if you have no other debts, they will let you push that front end ratio. Maybe not to the back end, but my impression is that they are flexible about that. If I am wrong, I stand corrected.
You do realize if a lender has higher than normal defaults FHA will no longer insure their loans right? Lenders worry when there are consequences to their actions. As the last two years have shown, there don't appear to be many consequences to bad lending - the government just gives you money to keep lending more. All in the name of "saving the economy".
The Fed does own the printing press, the problem becomes if they keep using it nobody will want to buy MBS and they will have to replace all of the MBS demand instead of getting away with the small part of demand they are replacing now. They don't get a free pass on this forever. As far as I can see there are no consequences to the Fed's actions to date either. They have been doing this stuff for the better part of a year. I am so disgusted at this point that I will believe there are consequences when I see them - I am not holding my breath.
Just look at the LTV chart, look at the FHA loans. Vast majority under 400k, it isn't like people have pricing power who use FHA loans. My point is that there are homes in VN and SFV that should be selling for $300,000 that are being sold for $500,000 because of the FHA "EZ-Financing" - and that is being done on purpose because the Feds know what those homes are really worth based on local incomes, and they are making the loans anyway, hoping to restart the frenzy....which they have done to a certain extent. I am seeing multiple bids on anything under $600,000 in my area - and absent FHA stupidity, that wouldn't be happening.
I assume their thinking is to create a "firebreak" at this level in order to support prices at around $500,000 in our areas. This will help everything above that price point. So far they are doing a pretty good job.
There is no doubt the Fed is massively stimulating the housing market. Just like when the banks were going to fire sale some debt, the Fed stepped in to ensure that didn't happen. The weak are being supported and the strong are being punished.
But what can we as citizens do about it? Sure, vote the bums out of all parties. Not support the market by not buying homes. But not much else we can do in the way of protest. If you have access to cash (hard money or just a bankroll) you can trying buying at trustee sales before the people get them on the open market, there are still some deals there.
Personally, I've moved my money as much as possible out of anything related to mortgage bonds.
FHA isn't as bad as you make it out to be, it is full doc after all. And the insurance isn't cheap. But prudent savers do have to compete with imprudent spenders using FHA.
What city are you looking in? I could do a mini LTV chart for the last 3 or 4 months.
Also, please pick a screen name so I don't have to keep calling you Anon.
Looking in the Thousand Oaks/Westlake area. I will admit I won't buy just anything. I need a single-story 3+2 SFR with at least 1,500sqft less than $500,000 and no (or minimal) HOA. Unfortunately there are only 8 properties in the entire 91360-91362 zips (approximately 40,000 homes) that fit those criteria and they are either trashed or unappealing in some other way.
I appreciate the help. If we would really return to "traditional lending standards" this mess would be resolved very quickly. For now, that doesn't seem to be in the cards.
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