NYT: Easy Loans in Expensive Areas

FHA was designed for low income borrowers and has been rushed into "saving" the overheated housing market by giving a loan to much higher incomes and house prices than the underwriting was ever designed for. There is also an issue of the obvious lack of internal controls at the FHA to stop fraud and abuse by the lenders which is magnified by more loans and more loans at higher limits.

The NYT has an article about FHA loans in expensive areas. Here are some quotes:

In 2007, the government did not insure a single mortgage in this city, one of the most expensive in the country. Buyers here, as well as in Manhattan, Santa Monica and every other wealthy area, were presumed to be able to handle the steep prices and correspondingly hefty down payments on their own.
...
Policy changes such as the shift in insurance, while often introduced on a temporary basis, are becoming so popular that they could prove difficult to undo.

Like most government programs, once they start they are almost impossible to stop. The special interests will insure they keep going. As will be shown later, The politicians simply can't help themselves.

Kenneth Donohue, inspector general for the Department of Housing and Urban
Development, the parent agency of the F.H.A., said the higher loan limits were increasing the potential risk to the F.H.A. Last week, the agency said its cash reserves had fallen below their Congressionally mandated minimum because of the large volume of foreclosures.

“If one of these higher-limit loans fail, that’s equivalent to two or three cheaper loans,” Mr. Donohue said. “You have to ask yourself, was the F.H.A. ever intended to address these markets?”

He sees another risk: larger loans will be a greater draw for those who want to commit fraud. That would exacerbate a problem already besetting the agency.

This is their own Inspector General saying these things. I'm sure he will be replaced soon with someone who will be more of a "team player".

And I often say that Barney Frank is always good for a blood boiler.. He certainly doesn't disappoint this time.

A few weeks ago, Congress extended the higher lending limits for another year. Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that he planned to introduce legislation next year raising the maximum F.H.A. loan by another $100,000, to $839,750.

His bill would make the new limits permanent.

They simply can't help themselves. Housing is unfortunately seen as sacred by one side of the aisle and that view is easily exploited by the special interest and/or gives an fig leaf to cover the massive subsidies to the market. We had this housing crisis because housing was viewed as sacred by one side and the free market was viewed as sacred by the other.. the confluence of those two views culminated into a massive unregulated credit bubble with housing as it's engine of growth.

Also remember that Fannie Mae and Freddie Mac jumped in to "save the housing market" as more and more lenders abandoned the market.. Look how well that has ended up for the American taxpayer. It is clear policy that everything will be done to "save" housing, and by save I mean to keep asset prices as high as possible. This will require a massive amount of money from the taxpayer much of which should be borne by bondholders and equity holders instead. The end game was clearly revealed by Mr. Stevens last week when he said that the FHA doesn't have to go to Congress to get a bailout. It already has an unlimited blank check for funding straight from the Treasury provisioned. This dogmatic belief that housing must be "saved" combined with no checks and balances (one party effectively controls the legislative and executive branch) will prove to be very expensive for the all of us.

New FHA Hope for Homeowner guidelines

HUD has released the new guidelines for the FHA Hope for Homeowners (H4H) program. Readers may remember that the previous version of H4H failed miserably and was completely ineffective. This version was designed to be more readily available to lenders so they could foist their toxic waste onto the backs of the taxpayers. I am sure it will be wildly successful in doing so.

With this version, if a borrower isn't yet in default the lender can refinance up to 105% LTV. If a borrower is in default the lender can lend up to 96.5% LTV if they keep 31/43 front/back debt to income ratios. And if a borrower is in default and the lender wants to push the ratios to 38/50 then the max LTV becomes 90%. Readers may remember the previous version required a max LTV of 90% regardless of scenario. I think the "borrower not in default" version will be very popular as it cleans up the banks books very nicely and turns toxic sludge into a loan in which no capital needs to be held against it since it is now guaranteed by the US government.

The up front mortgage insurance premiums (MIP) was 3% in the previous version and now it becomes 2%. The annual premium was 1.5% in the previous version and it is reduced to .75%. These premiums are what protects the taxpayers from having to bail out the FHA. Obviously the banks would want them as low as possible so that the borrowers are paying the banks more money rather than covering the FHA from losses. It looks like the banks did pretty good (from their point of view) in getting them reduced. Anyone thinking that the FHA won't be bailed out is delusional. It is simply a matter of when.

I went over what I thought the effects of this new H4H plan would be back in a post (more accurate: Rant) in early September that readers can read here:

"The Fed can tremendously influence rates, however temporarily, they can bring down rates to even lower levels so the qualification for H4H is easier and the banks can put as many loans in H4H in as little time as possible. While there may be a hit to capital to the banks they magically turn a non-performing loan into a performing loan which carries zero risk and they wouldn't have to withhold any capital or increase loan loss reserves against it."

I think that the underwriting details are sufficiently "loose" that the prediction could hold true. The banks will have to take principal write downs but I would bet for many non-performing loans the ability to refinance to FHA would actually free up capital. I would expect transaction volumes to drop even further as even less motivated supply comes on market. Fewer short sales due to H4H, fewer foreclosures due to HAMP. There will clearly be fewer people making their living in construction, real estate agents, and in the lending field as a result. Asset price "stability" will be maintained at a huge cost to taxpayers and the real estate industry but it is public policy that prices must be maintained. Allowing a massive credit bubble in the name of "free markets" but then socializing the losses AND having a policy that deflation will not be tolerated makes some pretty wacky (i.e. stupid) ideas suddenly sound logical to those desperate to "do something".

I wonder if the politicians have heard, or care about, adverse selection. I guarantee the banks are well versed and will act accordingly. The worst of the worst will get refinanced and the "good" loans won't be so the banks can maximize profit.

H.R. 3068 Tarp for Main Street 2009

One of the biggest complaints about TARP was that the taxpayers wouldn't get paid back and the taxpayers would be out $700 billion dollars.

Well, it turns out at least some of the banks ARE paying it back with interest. So what does Barney Frank want to do with the paid back proceeds? If you said pay it back and reduce the deficit, you are wrong. H.R. 3068 has provisions for $2 billion dollars in loans to borrowers to help pay their mortgage. Fannie Mae and Freddie Mac tried loans just like this to help reduce the foreclosure problem. They discontinued the program because, not unsurprisingly, it turns out borrowing money to catch up on all the money you borrowed isn't a solution to the problem. There is $4 billion more of giveaways in the bill as well.

I can't fathom how Barney Frank keeps getting re-elected. It has to be from people who want to vote themselves a paycheck instead of earning it.

I realize this sounds like a political post but I am about as apolitical as they come as I dislike both sides. I guess Barney Frank keeps getting my goat. I can only hope and pray that somewhere along the way H.R. 3068 gets quashed.