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Is There a Problem Looming with FHA Loans?

I'm seeing a lot of FHA streamline refi's that are going bad now.

In these cases, the servicers saw a borrower who was having difficulty, moved them into a refi hoping to reduce their rate a bit and buy them a payment holiday.

They were in the early stages of distress, and things haven't gotten better.

In addition, FHA and VA loans are not eligible for the Treasury mod program, so any borrower who's had a substantial income decrease is not going to get much in the way of payment relief.

Ben is correct that no safety net is a BIG problem. They're not going to address that issue any time soon, because then you'd REALLY see a decline in lending.

Big Banks in Trouble: Huge Mortgage Write-Downs Seem Inevitable

Most people don't even know what the "current" value of their house is. ]

Maybe not... while they're current. But they take a KEEN interest in how much they owe once they do fall behind on payments. Don't think for a minute that people aren't doing the math to see if the LTV is within their tolerance level.

Many borrowers were stupid enough to take the loan they were given. But they're not stupid enough to keep it.

New Government Policy: Tax Credit as Mortgage Down Payment

[Because FHA also allows borrowers to finance closing costs and other fees as part of the mortgage, the purchaser's equity can be very close to zero.]

Let's also ignore the possibility that these homes may well be worth less than the purchase price next year.

Ingrid Beckles: Freddie Mac's Plan for the Housing Market

[Why does Freddie Mac think they can set up a phone bank and resolve the problem with any effectiveness?]

Because their head is in the sand. They've been living in their own little bubble for so long, and so little good research has been done over the years, that they're still referencing studies conducted in the 90's to dictate loss mit policy.

Only now are thinking "out of the box." And for them, "out of the box" means trying to beat homeowners into submission with human calls, robo-calls, and more calls.

[Freddie Mac has found that borrowers are generally not seeking principal forgiveness, but instead require affordable cash flows ]

What is this, last year's data? Right now, EVERYONE is seeking principal forgiveness. It's a question of whether or not they'll settle for a plan that doesn't include it.

[Compare this number to Beckles’ opening statement that Freddie Mac has saved 120,000 homes from going in to foreclosure in aggregate. ]

Over what period? Based on your chart, it looks like they had 96000 REO's last year. When you consider that in past years, most defaults resolved themselves prior to FC, then for all of their "efforts," it doesn't look like their "prevention" efforts are terribly effective.

Why?

I've blogged about the double standard applied to homeowners who previously had good credit. If FNMA and FHLMC think that they can continue to be as stingy on their mod options as they've been, they're going to find themselves with a whole lot more inventory.

Case in point- the Obama plan. While it's a Christmas miracle that they let go of the mystical, magical Bair-endorsed front-end ratio of 38% and now, in some cases, they'll consider going to 31%, why couldn't they just go to the tried-and-true 28%?

I'm guessing because some dork came up with a model that said it's a good gamble.

Believe it or not, that 3% makes a difference in the daily (monthly) lives of a family.

Like the other "models" that got us into this mess, I'm expecting this one to blow up, as well.

Will the FHA Be the Next Government Bailout?

IME, they're making bad loans.

I'm seeing more FHA borrowers than before. This is probably due to the fact that FHA market share has increased, and the first wave of the sub-prime/ARM situation has subsided.

But when I look at the numbers these homeowners have, it's clear to me that these were "at the margin" loans, made to people who didn't have much of a monthly surplus to begin with, much less any reserves.

Add to this the continued weakening in the economy, and you've got more of a mess on your hands than we would have already had.

The Housing Blame Game, Redux

[any one political party can amply choose to focus their blame on their rivals, while ignoring their own role in this mess]

Cheer up, Paul: the government is expanding its influence in other areas lately. There will be much more to debate and discuss going forward.

[we didn’t get into a historic mess overnight, or because of any one bad decision or company. It took a collection of actions, and a multitude of players, to create a mess of this magnitude;]

You've taken the fun right out of the debate. We've been conditioned to believe that there is ONE bad guy, one party who's chiefly to blame. We will not be satisfied until that culprit is found and lynched- literally or figuratively.

[the sooner we all recognize this truth, perhaps the sooner we can begin to address real solutions that will make a difference and help prevent us from ending up here again.]

Like most of our problems, we're all to blame, to some degree. But admitting that would force all of us to accept responsibility, and... we'd rather not. Thank you, though.

Also, regarding real solutions.. That's not terribly attractive to anyone involved in the debate. It removes a platform from which politicians can proselytize, pander, and raise money, it limits finger pointing, and it gives everyone one less thing to complain about...

then we'd have to revisit the same old issues we've been talking about and not doing anything about for years. New problems allow us to feel better about ourselves, because we're temporarily distracted from all the old problems we still haven't solved.

The Economics and Ethics of Mortgage Default

[If you can get your principal reduced by hundreds of thousands of dollars just by quitting your job for a few months]

They're NOT... NOT reducing principal. They're offering- in a MINORITY of cases- a principal forbearance.

Two different scenarios.

The Humpty Dumpty Economy

[In a classic case of unintended consequences, the plan will encourage a massive new round of delinquencies and household income reduction ]

What's ironic is that in many cases, homeowners would be better served by the mod they can get on a case-by-case basis than the "streamlined" terms.

[In many cases, dual income families may decide to eliminate one job altogether as reduced mortgage payments combined with lower child care and other work related expenses will likely exceed the after-tax value of the lost paycheck.]

I see this as a good thing. Too many households have one member stuck in a dead-end job so they can pay for their "stuff." The mathemactics of that second job quite often made little sense on a net-after-all-costs basis. If we see a shift to parents spending more time with their children and less money on useless crap, this is a positive, unintended consequence.

Proposed Homeowner Bailout Plans are Loaded With Problems

[“Yes. But we all know, my friends, until we stabilize home values in America, we’re never going to start turning around and creating jobs and fixing our economy.”]

It sickens me that the only real choice is between this knucklehead and a guy who'd give free rein to the Franks, Schumers and Waters of the world.

Home values will stablize themselves. There is no governmental solution to this issue.

There is no fair or equitable way to intervene.

If we take the flu medicine, the cancer will get worse.

The Insanity of Adjustable Rate Mortgages Endures

[Even if borrowers are underwritten at the fully indexed rates, their financial behavior will still be anchored to the introductory payment.]

True. And most borrowers do not have adequate surplus in their REAL budgets to accommodate the increased payment.

[Buyers falsely believed (with former Federal Reserve Chairman Greenspan’s encouragement) that it was better to pay a lower rate now than buy protection for the future.]

Actually, for many ARM borrowers, they couldn't afford the fixed rate, so the only way to go was the adjustable.

Ergo, artificially inflated home prices.

The Financial Crisis Explained

[There is simply no painless solution to this fundamental situation; prices must be allowed to fall. ]

You're wrong- dead wrong.

Crisis... what crisis?

Don't you understand that the bailouts and the housing legislation and the possible RTC II are going to help us AVOID a crisis?

Senator Harry Reid: 'No One Knows What To Do'

Harry Reid: "My favorite lobbyists don't know what to do!"

Dissing and Praising the Recent Housing Bill

[However, the way it is being perceived by the commoners (myself included in the group-not the perception)) is that the banks/new law will help me save my house. ]

It will help some... 1 in 5 homeowners, at best... and that's assuming that they "use up" the program in the first 24 months.

Some are thinking that this may encourage lenders to do more modifications... and they ARE doing more modifications... but on your own, or even with "HOPE" Now, you've got coin-flip odds.

If you hook up with someone who really knows how to work the system, you can boost your odds dramatically.

Dissing and Praising the Recent Housing Bill

This bill gives investors a floor... so their losses may be lower if they participate in this bill, as opposed to selling their assets...

which allows them to offer principal forgiveness without the "moral hazard" of actually doing writedowns on existing loans.

The old argument was that if they did a writedown for you, then they'd have to do it for your neighbor.

Now they can tell the neighbor, "Hey, we CAN'T do one for you... because you don't qualify for this "special" program.

Also, many of the servicing agreeements don't have provision to write down principal, because it's such a foreign concept.

Dissing and Praising the Recent Housing Bill

Yes... they can offload the worst of their loans at a higher price than they could get by selling them to a vulture fund. And, they could potentially net more than they would realize through short sale/REO.