The FHA has to navigate the waters between qualifying enough borrowers to absorb the foreclosure inventory and qualifying too many borrowers who fail to make their payments and end up as foreclosures. If they error to the conservative, house prices fall because demand is curtailed. If they error to the permissive, the government is going to pay for a huge bailout.
The FHA stabilized the housing market by providing low-interest and low down payment loans to buyers when private institutions were unable and unwilling to do so. The FHA's market share typically runs from 8%-10% of the market, but it fell to 2% during the housing bubble as asset-backed security (ABS) loans took its market share. In the aftermath of the credit crunch and the withdrawal of private investment from unbacked mrtgages, the FHA's market share has climbed to over one-third of the mortgage loan market. The FHA and the GSEs insure over 95% of mortgage loans in the United States.
Since the down payments on FHA loans are only 3.5%, there is no real equity cushion for borrowers. After transaction costs, borrowers are 2.5% underwater when they leave the closing table. The lack of equity contributes to strategic default, particularly in markets that have continued to decline since FHA loans became prevalent.
To combat the problem of losses on FHA loans, Congress just passed an increase in the FHA insurance premium to help head off a government bailout. I have my doubts about how successful they will be -- or if anyone in government really cares.
Thursday, August 5th, 2010, 4:18 pm -- Diana Golobay.
The Senate approved its versions of HR 5872 and HR 5981, which would respectively raise the Federal Housing Administration's (FHA) multifamily commitment authority and allow it to hike its annual premiums for its single-family program.
Both bills now travel to the desk of President Barack Obama to be signed into law.
HR 5981, which also passed the House of Representatives last week, would allow the FHA to raise its annual premiums for the single-family program, raising the statutory cap rate to 1.55% from 0.55% — a flexibility that could ultimately reduce the cost of credit insured by the FHA, according to the Mortgage Bankers Association (MBA).
"While premium increases are never ideal, this bill was necessary to help improve the strength and stability of FHA's single family programs," said MBA chairman Robert Story Jr. "We are encouraged that FHA Commissioner [David] Stevens has indicated he may not need to raise premiums to the maximum, and we believe that that a small increase in the annual premium, coupled with a decrease in FHA's upfront premium [calculated in the chart below, from the FHA], will help stabilize FHA while lowering closing costs for many borrowers."
The annual premium raise will provide approximately $300m of additional insurance per month to the FHA's Mutual Mortgage Insurance (MMI) Fund, according to Stevens.
"I thank Congress for giving FHA the flexibility to adjust its annual premium at a time when our reserves are perilously low," he said. "With this authority, FHA is in a better position to address the increased demands of the marketplace and return the MMI fund to its congressionally mandated level without disruption to the housing market."
Stevens added: "While we appreciate and applaud this recent action, there is still work to be done. [The US Department of Housing and Urban Development] remains steadfast in its commitment to comprehensive FHA reform legislation, similar to the FHA Reform Act passed earlier this year by the House, which would further enhance FHA's lender enforcement capabilities and risk management efforts."
The MBA noted that the broader FHA Reform Act passed the House in June but has yet to be considered by the Senate.
HR 5872, which passed the House of Representatives last week, increases FHA's commitment authority for its multifamily insurance programs by $5bn for the remainder of the fiscal year — which ends at the end of September.
Without the increase, the FHA would have exhausted its current authority sometime in mid-August, according to the MBA.
The advantage and value of assumability becomes greater the more interest rates go up. If five or ten years from now we are back at 9% interest rates, an assumable 4.5% interest rate will have significant value. If we are still in the 5% to 6% range, assumablity won't make a significant difference.
... The FHA doesn't make loans; it backs mortgages for borrowers who pay a minimum 3.5% downpayment and meet the agency's other standards.
People often misunderstand the role the FHA plays. It does not actually make loans, it merely provides insurance to loans underwritten to a certain standard. IMO, this is the ultimate fate of the GSEs -- if they survive at all.
"I remain cautious because the big uncertainty is what house prices are going to do," Stevens said.
The FHA's business has ballooned during the housing bust as home buyers have struggled to get conventional financing. The agency's market share rose to about one-third of the mortgage market last year, up from 2% in 2006. Together, the FHA and government-run mortgage insurers Fannie Mae (FNMA) and Freddie Mac (FMCC) are providing backing for more than 95% of new U.S. mortgages.
In an effort to shore up its finances, the FHA has expelled more than a thousand lenders from its program in recent months and tightened its credit standards. For example, it now requires borrowers with down payments of less than 10% to have credit scores of at least 580.
A 580 FICO score is not a particularly high standard.
Still, many critics argue the agency needs to go much further if it wants to avoid a taxpayer bailout. House Republicans pushed unsuccessfully earlier this year to raise the minimum FHA downpayment to 5%.
The reason the increase to 5% was defeated was due to the fact such and increase would have dramatically diminished an already depleted buyer pool. Most FHA loans have the bare minimum 3.5% down payment because so few people have saved any more than that.
Stevens said the higher premiums are "a significant step" for attracting private capital back to the mortgage market because private mortgage insurers were having difficulty competing with the government's pricing.
Do we really need a large private mortgage insurance market? Is there something wrong with the FHA standard? Call me a socialist if you like, but I don't have a problem with the government providing insurance that crowds out the private sector. If the government does a good job, the insurance is much less expensive, and if it doesn't do a good job, the private insurers can fill in the gaps.
But he acknowledged that, in the current environment, the private sector doesn't have much appetite for mortgage risk.
No kidding.
According to Mortgage Bankers Association Senior Vice President Steve O'Connor, "The FHA is still going to be the only game in town in the near term for lower-income and cash-strapped borrowers."
In other words, the FHA is the only game in town. After the huge debt orgy we witnessed during the bubble and the ugly recession that followed, everyone is cash-strapped.
The hardest working condo yet
The people who bought at the bottom of the last cycle in 1997 obtained the full advantage of the housing ATM. For those that utilized it, they managed to spend every penny of appreciation. It is more convenient to sell the property to the bank over and over again while prices go up because the bank will still let you live there after prices go down and you quit paying. Plus, you can still consider yourself a homeowner even though all you really have is a loan with no equity. Banks really did make the deal irresistible.
The previous owner of this property paid $93,000 on 2/24/1997. They used a $50,000 first mortgage and a $43,000 down payment. At least it started out well.
On 12/28/2000 the owners obtained a $55,000 HELOC and pulled out their down payment plus a few bucks spending money.
On 7/12/2001 they refinanced with a $111,000 first mortgage.
On 3/3/2003 they refinanced again with a $155,400 first mortgage.
On 3/1/2004 they obtained a $70,000 HELOC.
On 8/27/2004 they refinanced the first mortgage for $276,000.
On 1/26/2005 they obtained a stand-alone second for $67,800.
Total property debt was 343,800.
Total mortgage equity withdrawal was $293,000 including their down payment. That is an astonishing amount on a small condo.
Total squatting time is difficult to measure. They went delinquent in early 2007, got a loan modification, and re-defaulted in 2010.
Foreclosure Record Recording Date: 05/19/2010 Document Type: Notice of Sale
Foreclosure Record Recording Date: 02/16/2010 Document Type: Notice of Default
Foreclosure Record Recording Date: 11/08/2007 Document Type: Notice of Rescission
Foreclosure Record Recording Date: 08/13/2007 Document Type: Notice of Default
Home Purchase Price … $230,000 Home Purchase Date .... 6/8/2010
Net Gain (Loss) .......... $50,966 Percent Change .......... 22.2% Annual Appreciation … 168.0%
Cost of Ownership ------------------------------------------------- $298,900 .......... Asking Price $10,462 .......... 3.5% Down FHA Financing 4.60% ............... Mortgage Interest Rate $288,439 .......... 30-Year Mortgage $59,103 .......... Income Requirement
$1,479 .......... Monthly Mortgage Payment
$259 .......... Property Tax $0 .......... Special Taxes and Levies (Mello Roos) $25 .......... Homeowners Insurance $250 .......... Homeowners Association Fees ============================================ $2,013 .......... Monthly Cash Outlays
-$136 .......... Tax Savings (% of Interest and Property Tax) -$373 .......... Equity Hidden in Payment $18 .......... Lost Income to Down Payment (net of taxes) $37 .......... Maintenance and Replacement Reserves ============================================ $1,559 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $2,989 .......... Furnishing and Move In @1% $2,989 .......... Closing Costs @1% $2,884 ............ Interest Points @1% of Loan $10,462 .......... Down Payment ============================================ $19,324 .......... Total Cash Costs $23,800 ............ Emergency Cash Reserves ============================================ $43,124 .......... Total Savings Needed
Property Details for 263 TANGELO #354 Irvine, CA 92618 ------------------------------------------------------------------------------ Beds: 2 Baths: 1 bath Home size: 864 sq ft ($346 / sq ft) Lot Size: n/a Year Built: 1978 Days on Market: 23 Listing Updated: 40371 MLS Number: U10003021 Property Type: Condominium, Residential Community: Orangetree Tract: Cm ------------------------------------------------------------------------------ Welcome to the quiet and secluded Orangetree community of Irvine. This cozy 2 bedroom, 1 bath condo features an additional bonus loft with extra large storage room. Fully upgraded kitchen features new countertops and appliances, newer flooring and cabinets, and an open layout, perfect for entertaining. The living area features original hardwood flooring, a spiral staircase leading to the loft, and a large sliding door that allows for plenty of natural sunlight opening to a large outdoor patio space. The bedrooms have been upgraded with new paint and carpet and the bathroom features new porcelain tile flooring, fixtures, and stainless steel detailing. Enjoy the scenic views and peaceful sounds of the flowing creek just below your patio while you BBQ with friends!
I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.
.jpg)
.jpg)
.jpg)
0 comments:
Post a Comment
Note: Only a member of this blog may post a comment.