Time for an FHA Shakeup? 20 comments
an article to
-
Font Size:
-
Print
- TweetThis
The expected report is out....
The Federal Housing Administration has been hit so hard by the mortgage crisis that for the first time, the agency's cash reserves will drop below the minimum level set by Congress, FHA officials said.
"It's very serious," FHA Commissioner David H. Stevens said in an interview. "There's nothing more serious that we're addressing right now, outside the housing crisis in general, than this issue."
Part of the reason it's so serious is that the FHA and HUD appear to be attempting to hide exactly how bad it is. Their own reports, for example, do not jive with the servicer reports (oops - you forgot those, didn't you?) which I've reported on before.
There is a serious debate that needs to be held here, but the bottom line problem is the same as it is in other areas of the financial system - that is, leverage.
It's too high. Allowing DTIs over 36% is ridiculous. Allowing people to buy homes through a Federal insurance agency with zero down payments (irrespective of how - whether through SFDPA - which has ended - or through "monetization" of tax rebates) is idiotic. Providing financing even with a 3.5% down payment is asinine as that still represents 100:1 or more leverage in real terms, since the standard real estate commission remains at or near 6% and on a resale that comes out of the transaction, meaning that even with a cash 3.5% down payment the buyer is in fact underwater and has infinite leverage at loan origination.
All of this is due to a misguided belief that artificially high home prices are good.
But it is axiomatic that they're good only for homebuilders and existing owners.
If you do not own a home, you obviously would like home prices to be low, just as you want iPod prices to be low, car prices to be low, milk, cheese and egg prices to be low and fancy cruise vacation prices to be low.
Buyers never want prices high for obvious reasons, yet everything the government has done is intended to do one and only one thing: attempt to prop up a popped asset bubble that their policies created in the first place.
An honest discussion of this fact is of course anathema to politicians who are recipients of tremendous lobbying pressure from the Realtors and home builders - the latter with a clear conflict of interest and the former who, paid on a percentage-of-sale based commission, obviously want high prices too.
The interest of the general public never enters into the debate - but it should, given what FHA's claimed mission in life is.
The truth, of course, is something different.
For more details and documentation please see here and here.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
Top
StockTalkers.-
1
David Fry
-
2
Cliff Wachtel
-
3
Mike Havrilla
-
4
David White
-
5
Hedged In
Top StockTalkers » -
1
Karl,
You point out that "DTIs over 36% is ridiculous" except you don't understand that DTIs can be even higher based on the buyers' ability to pay. We're sure you know the old 1/3 of your salary calculation as a basis for calculating affordablilty. The FHA is pushing for that. 31% is close, 36% - 38% is close enough and certainly not 'ridiculous', as you say.
Then you say that low down payments are a problem. However, being approved based on the ability to pay with a reasonable DTI means it doesn't matter what the down payment is. Right now they are setting up mortgages that are mostly reasonable to keep new homeowners in their homes.
Some areas have seen 50% home price reductions, if you can't see that that opens up the possiblity of ownership for many more people then you aren't understanding the market.
Karl: "Providing financing even with a 3.5% down payment is asinine as that still represents 100:1 or more leverage in real terms, since the standard real estate commission remains at or near 6% and on a resale that comes out of the transaction, meaning that even with a cash 3.5% down payment the buyer is in fact underwater and has infinite leverage at loan origination."
Also, don't ignore that the very article that you cite states that the FHA insists they are not going back to the government for more money.
"But Stevens, who became FHA commissioner in July, said these options are not on the table. "We are absolutely not going to Congress and asking for money for FHA," he said. "We're not going to need a special subsidy or special funding of any kind."
He stressed that the agency plans to take other steps that will help beef up the reserves. Some of these measures address fraudulent loans that can contribute to FHA's losses. "
ABILITY to pay had little to do with whether someone walked or stayed to try to save their home. THE AMOUNT OF THE DOWN PAYMENT -- their "skin in the game" -- is what determined stability. So what does the government do? Push no-money-down or 3.5% down loans, creating the next generation of "walkaway" mortgages.
When you put $50,000 down on a $250,000 loan, and a few years of sweat equity making the house your home, you don't walk, even if the temporary current value falls to $200,000...
Joseph,
The chart's components are,
Negative Equity
Downpayment less than 3%
Mortgage Reset
FICO Score
Unemployment
You said, "you don't walk, even if the temporary current value falls to $200,000" but it seems by the chart the the greatest number of foreclosures were due to Negative Equity.
Besides, the chart is from 2008, when the housing market was still in decline, mortgage rates were higher, and unemployment was increasing.
Now, with the recession probably over, 4 out of the 5 components on the chart should actually improve, thus decreasing the chances of foreclosure.
The one that won't improve much, "Downpayment less than 3%" actually might given that the downpayments sought are 3.5% which is some "skin". If and when things do improve, you will see more potential buyers offering higher down payments for properties with interest from multiple buyers. You can call it finally returning to normalcy.
The "tightening" credit standards announced today were well in the works for months, and there are more coming. But the FHA needs to do more. Simply raising premiums ain't the answer. Rather, increase required down payments for loans with a 30 year amortization schedule, which have a "slow as molasses" repayment of principal. And for folks who don't have a sizable down payment, put them into a 20-year or 15-year amortizing loan where principal is paid down faster, to offset the small down payment. If you don't have much money for a down payment today, you should be put into a loan where you pay down principal faster. Sorta "Duh".. (Hud spelled backwards, of course!). FHA/HUD programs should be focused on loans that promote "sustainable" homeownership, which invovles home owners building equity in their home over time without relying on home price apprectiation. This is not rocket science.
I just hope they kick the can far enough down the road, about to the point I step of for my dirt nap.
My poor children.
Respectfully, this would term the highly successful VA loan program as 'idiotic'. Do you really think VA loans are idiotic, or is this maybe an oversight or exception?
I will note that in many cases, people with VA loans have guaranteed DoD pensions which could (and would) be garnished. Perhaps that 'floor income' makes a difference?
It also includes the ability to amass reserves (proved only by having done so before - it is called a down payment) in the event that you lose your job or otherwise have an interruption of income or, God Forbid, your "new house" needs a water heater, furnace or washing machine replacement.
DTIs are commonly being approved into the FIFTY PERCENT range today. That's ridiculous and is absolutely unsupportable. DTIs are computed off GROSS income (yet we all pay taxes) and in high-cost-of-living areas (California anyone?) taxes, car insurance and other "must buy" items eat dramatically into actual disposable income. No, eating cat food (or scrounging into the dumpster for something) is not acceptable.
50% price reductions are great. However, this does not mean that one can raise DTIs or lower down payment requirements in response.
The age of "home prices never decline so if the buyer gets hosed we won't" is OVER.
On Sep 18 01:50 PM Karl Liesman wrote:
>
> Karl,
>
> You point out that "DTIs over 36% is ridiculous" except you don't
> understand that DTIs can be even higher based on the buyers' ability
> to pay. We're sure you know the old 1/3 of your salary calculation
> as a basis for calculating affordablilty. The FHA is pushing for
> that. 31% is close, 36% - 38% is close enough and certainly not 'ridiculous',
> as you say.
>
> Then you say that low down payments are a problem. However, being
> approved based on the ability to pay with a reasonable DTI means
> it doesn't matter what the down payment is. Right now they are setting
> up mortgages that are mostly reasonable to keep new homeowners in
> their homes.
>
> Some areas have seen 50% home price reductions, if you can't see
> that that opens up the possiblity of ownership for many more people
> then you aren't understanding the market.
On Sep 18 11:23 PM RatWatcher wrote:
> 'Allowing people to buy homes through a Federal insurance agency
> with zero down payments (irrespective of how - whether through SFDPA
> - which has ended - or through "monetization" of tax rebates) is
> idiotic.'
>
> Respectfully, this would term the highly successful VA loan program
> as 'idiotic'. Do you really think VA loans are idiotic, or is this
> maybe an oversight or exception?
>
> I will note that in many cases, people with VA loans have guaranteed
> DoD pensions which could (and would) be garnished. Perhaps that 'floor
> income' makes a difference?
Only to some extent.
VA loans historically have had rather nasty default rates (even in bubble years); however, if there is an argument for a government benefit IN EXCHANGE FOR THE SERVICE THAT OUR FIGHTING MEN AND WOMEN HAVE ALREADY PERFORMED, that (might) make sense.
There is the other side of this argument however as well: Those who have served should, more than any other group of people, NOT be preyed upon.
One thing I do like about the VA program is that their loans are generally assumable, which helps a great deal if the borrower gets in trouble.
Your "skin-in-the-game" comments, are however, not right......there neve has been a real study absolutely correlating down payment to deafault...
Every study correlates Death; Disability: Discharge: Down turn in the economy; and Divorce as the top reasaons for default.....essentially, acts of god to some degree....
On Sep 19 08:54 AM Karl Denninger wrote:
> "Ability to pay" is more than just the ability to make a payment
> RIGHT NOW.
>
> It also includes the ability to amass reserves (proved only by having
> done so before - it is called a down payment) in the event that you
> lose your job or otherwise have an interruption of income or, God
> Forbid, your "new house" needs a water heater, furnace or washing
> machine replacement.
>
> DTIs are commonly being approved into the FIFTY PERCENT range today.
> That's ridiculous and is absolutely unsupportable. DTIs are computed
> off GROSS income (yet we all pay taxes) and in high-cost-of-living
> areas (California anyone?) taxes, car insurance and other "must buy"
> items eat dramatically into actual disposable income. No, eating
> cat food (or scrounging into the dumpster for something) is not acceptable.
>
>
> 50% price reductions are great. However, this does not mean that
> one can raise DTIs or lower down payment requirements in response.
>
>
> The age of "home prices never decline so if the buyer gets hosed
> we won't" is OVER.
>
> On Sep 18 01:50 PM Karl Liesman wrote:
> I published a graphic provided by information from economist Stan
> Liebowitz (here: seekingalpha.com/artic...)
> making the argument that most mortgages people walked away from were
> PRIME, not sub-prime.
>
> ABILITY to pay had little to do with whether someone walked or stayed
> to try to save their home. THE AMOUNT OF THE DOWN PAYMENT -- their
> "skin in the game" -- is what determined stability. So what does
> the government do? Push no-money-down or 3.5% down loans, creating
> the next generation of "walkaway" mortgages.
>
> When you put $50,000 down on a $250,000 loan, and a few years of
> sweat equity making the house your home, you don't walk, even if
> the temporary current value falls to $200,000...
Not correct. Walk away is a financial decision that people decide based on what they believe is in their best interest, based on many factors. Down payment is only one of them, affordability is another one, potential rental cost and loss of tax benefit is yet another one, but an even more important factor that few have noticed is the expectation of future housing prices, future dollar valua, and future mortgage rate, and potential hit to your credit score, and how much a good credit is worth to you.
A reasonable person would consider all these factors and decide what is best in his/her interest.
For example in the case of a $50K down payment on a house which is now upside down by $50K. Should you walk away or should you not? You walk away if you have lost your current job but just landed a job in another state, because walk away is better than sell and then put in another $50K of your money to pay back the loan. On another hand, if you stay in your area, the rental cost plus loss of tax benefit is higher than your current mortgage payment, then you do not walk away.
Another example, some one bought a house for $500K with zero down payment 6 months ago, and a teasor interest only rate of 1%. He isnow upside down by $250K as the house is worth only $250K but the loan is $500K. Would he walk away? Of course not. He is now paying $417 interest only for the monthly mortgage, after tax benefit it costs him only $278 per month. Why would he walk away and start to pay $2000 per month to rent a house of similar size. He will stay in the house until the teasor rate of 1% end in another 2 years, in year 2011. By that time who knows a house may be worth $20M on depreciated dollar and his loan is only worth $550K so he basically gets the house for FREE thanks to thecollapse of dollar.
Many factors affect people's decision to walk away. And not all people make the correct decision. But you can bet that all people believe their decision is in their own best interest.
Karl,
The FHA wesbite itself shows that the maximum DTI to qualify is 29% for straight gross income and 41% when counting recurring debt.
Can you prove your statement that "DTIs are commonly being approved into the FIFTY PERCENT range today." If you don't have proof, again please retract.
www.fha.com/debt_to_in...
As for other "unforseen" expenses, doesn't that factor in when renting also?
[Please see additional links added to article and SA editor response below.]]
On Sep 19 08:54 AM Karl Denninger wrote:
> "Ability to pay" is more than just the ability to make a payment
> RIGHT NOW.
>
> It also includes the ability to amass reserves (proved only by having
> done so before - it is called a down payment) in the event that you
> lose your job or otherwise have an interruption of income or, God
> Forbid, your "new house" needs a water heater, furnace or washing
> machine replacement.
>
> DTIs are commonly being approved into the FIFTY PERCENT range today.
> That's ridiculous and is absolutely unsupportable. DTIs are computed
> off GROSS income (yet we all pay taxes) and in high-cost-of-living
> areas (California anyone?) taxes, car insurance and other "must buy"
> items eat dramatically into actual disposable income. No, eating
> cat food (or scrounging into the dumpster for something) is not acceptable.
>
>
> 50% price reductions are great. However, this does not mean that
> one can raise DTIs or lower down payment requirements in response.
>
>
> The age of "home prices never decline so if the buyer gets hosed
> we won't" is OVER.
>
> On Sep 18 01:50 PM Karl Liesman wrote:
Your definition of "Ability to pay" is wrong. By your definition no one can buy a house unless it is paid in cash, because who can absolutely guarantee the continuation of income.
"Ability to pay" means the ability to pay current monthly mortgage, no more and no less.
Let me give you one example to open your eyes:
I have no problem extending a loan to some one who just bought a house for $500K at fair market value, or even at above fair market value at $600K, or even $750K is fine with me, if the borrower agree to pay 10% sub-prime rate, knowing full well that the borrower can only afford the first 12 month of mortgage payment, and knowing full well that the borrower, deeply under the water, may decide to walk away from the loan a year later, leaving me with a useless re-possessed house. I have NO PROBLEM doing that and feel comfortable making that statement.
Sub-prime? Upsidedown house equity? Walk away? What would you think about those dreaded words? Did I make a terrible decision extending that loan to the borrower?
Karl: Before you immediately jump onto me and call my name for making a ridiculous claim. Let me tell you why:
Because I own that house to start with. I never had any money to loan to the borrower to start with. I sold the house to him at $750K, which is above market value. The proceeding of $750K I receive is the loan I extended to him. No physical money is actually exchanged hands, but the borrower now owes me $750K, and I get to be paid high sub-prime interest rate for one year, and when the borrower walks away when he could not make the payment any more, the house is back to me. I made more money than I could had I rented the house out during the time.
So who is the loser at the end of day?
On Sep 19 08:54 AM Karl Denninger wrote:
> "Ability to pay" is more than just the ability to make a payment
> RIGHT NOW.
>
> It also includes the ability to amass reserves (proved only by having
> done so before - it is called a down payment) in the event that you
> lose your job or otherwise have an interruption of income or, God
> Forbid, your "new house" needs a water heater, furnace or washing
> machine replacement.
>
> DTIs are commonly being approved into the FIFTY PERCENT range today.
> That's ridiculous and is absolutely unsupportable. DTIs are computed
> off GROSS income (yet we all pay taxes) and in high-cost-of-living
> areas (California anyone?) taxes, car insurance and other "must buy"
> items eat dramatically into actual disposable income. No, eating
> cat food (or scrounging into the dumpster for something) is not acceptable.
>
>
> 50% price reductions are great. However, this does not mean that
> one can raise DTIs or lower down payment requirements in response.
>
>
> The age of "home prices never decline so if the buyer gets hosed
> we won't" is OVER.
>
> On Sep 18 01:50 PM Karl Liesman wrote:
Spent some time on your blog this weekend. I share your passion on the ubiquitous corruption.
I am a loan originator who has seen the underwriting standards lowered. Virtually all mortgages today Government (FHA and VA) and Conventional (Fannie and Freddie) are underwriten using Fannie's Desktop Originator or Freddie's Loan Prospector. These are web-based underwriting software programs. Using these programs I know for a fact that while FHA used to enforce a 41% backend ratio, today they are approving loans at 50% DTI and higher. I have seen approvals for DTI's as high as 54% where the loan-to-value above 95%.
Additionally borrowers with existing FHA mortgage can streamline refinance into another FHA loan. There is no appraisal required or income or employment verification. You simply need to have made your mortgage payment on time for the last 12 months. I imagine that plenty of these streamlines are being done on loans that are underwater. It is also entirely possible that these loans are being made to people who are unemployed.
Karl is correct when he claims the government is doing everything it can to prop up values.
On Sep 19 12:25 PM Karl Liesman wrote:
>
> Karl,
>
> The FHA wesbite itself shows that the maximum DTI to qualify is 29%
> for straight gross income and 41% when counting recurring debt.
>
>
> Can you prove your statement that "DTIs are commonly being approved
> into the FIFTY PERCENT range today." If you don't have proof, again
> please retract.
>
> www.fha.com/debt_to_in...
>
> As for other "unforseen" expenses, doesn't that factor in when renting
> also?
>
> On Sep 19 08:54 AM Karl Denninger wrote:
This supports the conclusion that I reached via a different approach seekingalpha.com/artic...
On Sep 18 02:12 PM Joseph L. Shaefer wrote:
> I published a graphic provided by information from economist Stan
> Liebowitz (here: seekingalpha.com/artic...)
> making the argument that most mortgages people walked away from were
> PRIME, not sub-prime.
>
> ABILITY to pay had little to do with whether someone walked or stayed
> to try to save their home. THE AMOUNT OF THE DOWN PAYMENT -- their
> "skin in the game" -- is what determined stability. So what does
> the government do? Push no-money-down or 3.5% down loans, creating
> the next generation of "walkaway" mortgages.
>
> When you put $50,000 down on a $250,000 loan, and a few years of
> sweat equity making the house your home, you don't walk, even if
> the temporary current value falls to $200,000...
High house prices are a drain on economic activity and discriminate against the poor.
Interesting that the efforts of Clinton then carried forwards to increase home ownership fort poor people, doubled the price that poor people had to pay for owning a house. The logic of how that "helps" poor people own their own house has always eluded me.
Although your logic is sound, I disagree in some sense with your campaign to attack the government's efforts to help slow down foreclosures and stimulate people buying houses, right now housing is 20% under valued, when the rash of foreclosures stop (in about two years) prices will go up, so writing a 100% or 110% LTV mortgage now is a lot safer than it was in 2006 when housing was 40% over priced.
Much as it grates, I believe that supporting the housing market temporarily at a grass roots level is cheaper in the long term than giving money to bankers who will lose if houses foreclose,
I don't really want them to kick the can down the road; I got carried away with my sarcasm.
I want responsibility, and people that put 20% down on a home, and mortgages that are never sold or pooled and used as a gambling chip in someone's perverse game.
Unethical practices yield unethical results.
Keep up the good work Karl.
On Sep 18 09:45 PM ebworthen wrote:
> What? A government (taxpayer) program being taken advantage of for
> political purposes, short term profit, privatized gains and socialized
> losses, and warm fuzzies? How could this happen! Say it ain't so!
>
>
> I just hope they kick the can far enough down the road, about to
> the point I step of for my dirt nap.
>
> My poor children.
Please don't be in awe, anyone can do a valuation, just buy a copy of International Valuation Standards (IVS) and follow the instructions, it's like paint by numbers.
I contend that if USA has mandated IVS there would not have been a housing bubble and if they had adopted it in March 2008 when I started my "campaign" the credit crunch would not have been nearly so severe. Instead USA uses Voodoo Valuation Standards which has the unique ability to provide the wrong answer, i.e. one that leads everyone to say "what a surprise" in the future.
My metrics are as first explained last September www.marketoracle.co.uk...
are that what IVS calls "other than market value" which is a useful number to know when the market is in what IVS calls disequilibrium (George Soros users that word also) can be determined, and I demonstrated this from:
1: Nominal GDP per house
2: A function of the 30 Year Treasury (which is in fact an "S" Curve".
Does it work? -Well it did in the past 98.8% R-Squared is a good correlation for 100 years of data.
In the future? We shall see, housing markets move slowly, the number I put out in February based on the then projections of the two variables I use was 40% peak to trough, I reviewed this recently seekingalpha.com/artic...
Perhaps a more immediate answer to that question is the predictions I made on the stock market using the same approach (anyone can make an accurate prediction on the past).
For example on 26th Feb I wrote that the S&P 500 would turn after 675 was pierced (it was for about two hour on 6th March) and then rally very strongly (it did 55% is a strong rally).
www.marketoracle.co.uk...
Same metrics, and as far as I know no one else made such an accurate prediction.
But don't be in awe, I just used IVS. Nothing more complicated than that.
On Sep 20 12:16 PM lower98th wrote:
> Ok Andrew (and please don't say because you can do valuations, though
> I am awed by your ability in that area): could you please share
> the metrics you have used to conclude that US homes are 20% undervalued.
> Though this is the case in some places by my benchmarks, it would
> not be universal. And Case Shiller metrics, I believe, continue
> to show some overvaluation.