Thursday, October 8, 2009

How are these FHA loans being made?

From the NYT (emphasis is mine):
“what does the F.H.A. think it is doing by asking only 3.5 percent?”

Any more than that and Ms. Shimon, 45, would still be a renter. As it was, she cashed in her retirement savings account to come up with the necessary funds. She did not have enough to spare for closing costs, so her mortgage broker arranged a deal where the charges were wrapped into the loan at the cost of a higher interest rate. She cried when the deal was done.
Is Ms. Shimon a good bet? Even she has no easy answer. Her mortgage payment, $1,100, is half of what she takes home every month. It is not easy to make ends meet....

If we are generous and assume Ms. Shimon pays 25% for taxes, social security, etc. Her FRONT END DTI (just housing costs and no other debt) is almost 38%. It is highly doubtful she pays that much in taxes so it is likely her DTI is much higher. Are we really doing this person any favors giving her a loan? Rolling closing costs into a loan for a buyer who is marginal to begin with just maximizes the cost to the borrower. We

Chaz Fullenkamp, an automotive technician in Columbus, Ohio, got an F.H.A. loan even though he was living on the financial edge. “If I got unemployed, I’d be wiped out in a month or two,” he says. Thanks to the F.H.A., however, he is better off than he used to be.

Mr. Fullenkamp used F.H.A. insurance to buy a house this spring for $179,000. The eager seller paid the closing costs and also gave Mr. Fullenkamp $2,500 in cash. He immediately applied for the $8,000 tax rebate. Even taking his down payment into account, he came out ahead.

I knew in my heart I could not really afford the house, but they gave it to me anyway,” said Mr. Fullenkamp, 22. “I thought, ‘Wow, I’m surprised I pulled that off.’ ”

There are a couple zingers in here. First, with cash back at closing and the tax credit this borrower got PAID TO BUY A HOUSE. This is the stuff that was happening during the end of the boom to move houses at too high of prices to a sucker buyer. Second, the borrower knows he can't afford the house... decides to try and buy it anyways and the bank has no problem giving him a loan because the loss is on FHA not the bank. Insanity.

Barney Frank is always good for a blood boiler and he doesn't disappoint:
Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it.

“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

Yes, it is clearly the stated policy of the administration to support housing at all cost and the stated policy of the Federal Reserve for "price stability". Apparently we will throw the borrowers under the bus, the taxpayers under the bus and the dollar under the bus to make sure that happens. Yet the line we are being sold is that we are all better off for it.

Providing liquidity is one thing. Keeping the mortgages flowing and giving them to people who can afford them under normal underwriting guidelines is a very positive thing. But just giving away unsound loans in the desperate hope to stop falling prices and pay for it later is madness. You have borrowers who are financially neutered for a very long time and the losses will be borne by the taxpayers. This is kicking the can and buying time with the financial lives of uneducated borrowers (Don't forget these borrowers profiled on CNN, FHA as well).

The lies being spread about sound underwriting by the FHA are just designed to keep people from worrying about the problem until we have another "We have to bail them out, they are too big to fail and a systemic risk if we don't" moment. Nobody could have possibly seen this coming.. right?


ronald said...

Some bits from Demarco written testimony and Krasting view of what they mean in real world language.

The full link:

Currently the Enterprises are managing a real estate owned (REO) inventory of almost 100,000 properties, a number expected to grow.
The government can’t sell this crap. If they did, it would just tank the RE market and cause more Prime defaults. Uncle Sam is going into the rental business big time. But that does not look too promising either. Some sobering thoughts on that market:

-As of mid- year 2009, rental vacancy rates hit their highest level since the U.S. Census Bureau began tracking vacancy rates in the 1950s.


The Enterprises will refinance those mortgages (ones in default) without requiring additional private mortgage insurance. If there already is mortgage insurance on the existing mortgage, that coverage will carry forward to the new mortgage.

This is a flat out subsidy for the PMI providers. When a loan goes into default and a loss is realized the insurance that is there should cover a significant portion of the loss. By rolling the loans the loss is avoided, and so is the necessity to pay up on the claim. This is keeping the PMI folks alive and well. One of the larger players in this space is AIG. We wouldn’t want to do anything that would hurt them would we?

Effective Demand said...


100,000 REOs in the context of 5 million sales a year isn't much. I don't see any evidence of the GSEs holding onto a large portfolio of REOs.

Anonymous said...

I guess personal responsibility is a thing of the past....

TomK said...

So is this who all these buyers are? I have been following Simi Valley home sales for some time and keep thinking who are these buyers. And I keep seeing people say how hot the market is, at the lower end. But its hot nonetheless so who is buying? Is it just a bunch of people who were foreclosed on a few years back jumping in and getting $8000 to boot. FHA is the new Countrywide and will surely suffer the same fate but how long will that take?? Really confused about who is actually out there buying right now.

Effective Demand said...


I think there are a lot of responsible people. It is just irresponsibility is being rewarded and prudence is being punished.

ronald said...

100K REO doesn't sound like much relative to the total sales volume but REO's tend to be distributed in clusters so it would be expected that the GSE inventory reflects that distribution. The FED did not expect the subprime foreclosures to impact the overall RE market based on the belief they were a small percentage of the total but the overall market was impacted significantly.