Philip Gvinter

Big New Housing Problem: Mortgage Insurers Back Off

Karl,

I would agree with you when it comes to the purchase of rental properties and even 2nd homes. I have to disagree when talking about primary residences. the 4:1 leverage represented by a 20% downpayment is attractive but is just not a reasonable requirement in high cost markets. As much as I would personally like to see property prices spike down significantly which would increase their affordability I do not see a further 40% haircut as being healthy for the overall economy on a long term basis. This would be a bigger blow than the Fed could help absorb and would put not only the commercial banks but also the Federal Home Loan Bank system at serious risk with a very low likelihood of survival. Lending standards do need to be tightened a bit more but they are fairly close to sustainable at this point.

Big New Housing Problem: Mortgage Insurers Back Off

The FHA loans are 96.5LTV and the 1.5% "funding fee" is indeed upfront MI with 55bip annual premiums. To the best of my knowledge the FHA MI program is run by the FHA itself not by an outside vendor. The FHA is going to take some bad losses on the mortgages it is currently insuring.


On Jul 16 06:39 PM mortgageminister wrote:

> I can't believe no one has mentioned the 97.5% LTV FHA loan that
> requires a 1.5% up front mortgage insurance premium to HUD as well
> as MI on the back end to protect the lender. Another housing bubble
> in the making. Since the crisis FHA loans account for, don't quote
> me on this 43% or more of all purchase transactions and increasing
> on a daily basis in a DECLINING market. Almost all of the FHA loans
> made at the beginning of last year, (I'm in CA) are underwater now.
> Does this mean that FHA loans will eventually become uninsurable
> should all MI companies vanish or I guess they will make exceptions
> for FHA loans because an FHA loan is essentially a Gov loan.

Big New Housing Problem: Mortgage Insurers Back Off

Don't worry guys FHA loans are still available and are filling in the hole that MI pricing created by making it very expensive to buy a house without 20% down!

Please pardon my sarcasm but I agree with Karl and the above comments in principle but not entirely on the details. ALT-A and option ARMs are fortunately already gone and should never come be allowed to come back. Lending standards are still too lose with 50DTIs and 3.5% down payments being allowed. We need to tighten some more but not all the way back to 20% down and 36DTI. The old standard on DTI used to be 33housing 38 total debt. That is perfectly reasonable and I can even accept up to 40 total DTI regardless of the housing ratio. Really since at least a part of the mortgage payment is tax deductible it is better for the housing payment to make up a part of the DTI than for other debt. As to 20% down, that is just unrealistic. 2nd mortgages and MI have existed within reasonable limits for decades and should not be taken off the table. I think that FHA guidelines should be 5% down and reasonable access should be made for private MI with 10% down. We do want to let the housing prices correct themselves but want some level of orderliness to the process. By tightening standards from where they are today we would take out one of the remaining props to the market and let it reach true equilibrium. Tightening the standards too much will lead to even lower prices more rapidly and can bring about undesirable levels of instability. As to having to produce three years of tax returns as the only viable alternative to W2s, I think that allowing 2 years of bank statements should do just as well since tax tricks are legal and are not outright fraud. Many business owners simply find ways to write down their taxable income below its true level. The consequences of this should not include an inability to secure credit.