Seth Chalnick

Will FHA Fall into the Sub-Prime Trap?

Hi BullnBear,

Re: “jobless recovery”… a paradox consists of two seemingly opposite terms that make sense when joined together… like “jumbo shrimp”.

The idea of a “jobless recovery” is just wishful thinking. Subprime crashed because people couldn’t afford their payments. When they couldn’t afford their payments, and they couldn’t get more cash out from refinances, this put the whammy on spending, not just for the subprim-ers, but for everybody trying to do refinances, because the re-sets reversed the trend of appreciation.

Then, consumer discretionary spending died because people had less money. Spending makes up 70% of our GDP. So our GDP decreased. But on paper the GDP, along with corporate earnings reports, continue to defy gravity because corporations are cutting back on payroll and marketing and every other expense they can to make their earnings reports attractive. The banks, with the help of the government, are just flat out ignoring their non-performing assets and the costs that go with them.

Meantime, everyone I talk too seems to be counting their blessing that they’re only earning 30% less than they did last year while nobody’s spending since 20% of folks are unemployed and the majority of the rest of the folks are either underemployed or afraid they’ll potentially become unemployed.

The real problem with housing didn’t even start yet in earnest and it will wreak havoc on the jobs market, especially when the real stimulators of the economy… the small business owners… start seeing their own home loans adjust to principal and interest over 25 year amortizations while the rest of their credit lines get cut out from under them, on personal credit cards, and business tradelines.

No jobs = no recovery.

To me, the stock market seems manipulated beyond belief… sort of like fattening up the 401k chickens before the short sell slaughter.

Will FHA Fall into the Sub-Prime Trap?

As a real estate insider I whole-heartedly agree with this article, with the exception of the error the author makes in saying that people can “use the $8,000 first time homebuyer tax credit for that 3.5%” down payment. While the FHA allows for this in theory, no lender extends this feature in practice, because it is unclear how and when the semi-government institution will credit back the lender.

Meantime, to add key perspective to this article, the FHA loans cost consumers considerably more per month than conventional loans do, and they become downright cost prohibitive as the sale price approaches $400k… and yet buyers can borrow right up to “agency jumbo” loan limits, which for example in SD are $697,500.

Approximately half of the increased monthly payment stems from the borrowing of more money… the rest comes from the multiple whammies of higher rate, upfront mortgage insurance premium (added to the loan balance), and monthly mortgage insurance premium… all of which are applied to the whole balance enchilada, which is obviously really high… i.e. 96.5% loan to value.

I say key perspective, because the higher cost of all this directly impacts the ability of folks to repay.

For further perspective on this issue, and insight into the party line rhetoric most real estate agents regurgitate via groupthink… SA fans may be interested in checking out a very telling thread on Trulia.com, whereby industry insiders go at it, pitting party line sound bytes against fundamental analysis.

The Trulia question is posed by a Long Beach broker, named Ben Nicola, and it is entitled, “What’s Wrong with FHA financing?”

This link should take you there… www.trulia.com/voices/...