1.7 million borrowers are seriously delinquent on government-backed loans
The US taxpayer (you) paid for the mess the bank’s made. Back in late 2008, the Department of Treasury took the GSEs under conservatorship and injected about $150 billion into them to make them solvent. And although the FHA has not officially requested a bailout yet, it’s no secret a bailout is coming. The only mystery so far is when the bailout will come and how large the ultimate price will be.
Politicians have consistently lied to us about housing bailouts. The first batch of lies surrounded the GSEs:
“There is no guarantee. There’s no explicit guarantee. There’s no implicit guarantee. There’s no wink-and-nod guarantee. Invest and you’re on your own.” — Barney Frank, senior Democratic congressman, notable Fannie supporter, later chairman of the House Financial Services Committee
We do not believe there is any government guarantee, and we go out of our way to say there is not a government guarantee.” — John Snow, Republican and secretary of the Treasury
“The facts are that Fannie and Freddie are in sound situations.” — Christopher Dodd, senior Democratic senator, prominent Fannie supporter, chairman of the Senate Banking Committee
“We have no plans to insert money into either of those two institutions [Fannie and Freddie].” — Henry Paulson, Republican and secretary of the Treasury
Were these honest and upstanding politicians merely mistaken? ~~ giggles to self ~~
At first, any rumors of an FHA bailout were met with denials. Slowly, begrudgingly over time, the information was leaked that the FHA may have some financial problems, but politicians assured us any bailout would be small. Then more damaging information was revealed, and the Obama Administration admitted an FHA bailout of less than $1 billion might be necessary. Do you see a repeating pattern here?
The general public is spoon-fed bad news to prevent any real political backlash against the way politicians and the banks are using the FHA to support house prices and save their skins. First we get bad news, which is promptly denied. Then there is a recognition and acceptance of part of the bad news. Then more bad news comes out, and the pattern of denial and partial acceptance is repeated.
So here we go with more bad news.
By NICK TIMIRAOS — Updated June 4, 2013, 6:39 p.m. ET
The Federal Housing Administration’s projected losses over 30 years could reach as high as $115 billion under a previously undisclosed “stress test” conducted last year to determine how the agency would fare under an extremely severe economic scenario, according to documents reviewed by a congressional committee.
The forecast was significantly worse than the most severe estimate included in the government mortgage-insurance agency’s independent actuarial review released last November. The FHA’s outside actuaries modeled the analysis along the lines of the annual stress test employed by the Federal Reserve Board, which gauges how the nation’s largest financial institutions would fare in the event of a significant economic shock. The FHA isn’t required to use the Fed test.
The findings are part of an investigation by the House Oversight and Government Reform Committee, headed by Rep. Darrell Issa (R., Calif.). In a letter sent last week, Mr. Issa asked Carol Galante, the FHA’s commissioner, why the agency hadn’t disclosed the figure, which he called “troubling.”
Why would this information be intentionally repressed? Politicians will claim it’s because this worst-case scenario is unlikely and there is no reason to unduly alarm the public. That is bullshit. The public has a right to know the true costs of bailing out the banking industry, and the public has a right to oppose such bailouts when they become too costly. Bankers and the politicians they buy off with their campaign dollars don’t want the public to know how bad it is until its too late. Even then, politicians will offer some glib excuse like it was “necessary” to save the economy, the banking system, or jobs. They try to portray the bailout as helping the common man who they are ripping off. The lies get layered on like candy coating a turd.
So is this the end of the bad news? It can’t get any worse, can it?
Fri May 31, 2013 5:59pm EDT
(Reuters) – Well over a million U.S. homeowners are months behind on payments on government-backed mortgages, raising the risk federal housing agencies will end up facing the cost of managing a fresh flood of foreclosed homes, two government watchdogs said on Thursday.
Some 1.7 million borrowers have missed several payments on mortgages backed by the U.S. government, the inspectors general of the Federal Housing Finance Agency and Department of Housing and Urban Development said in a joint report.
These loan delinquencies represent a “shadow inventory” of homes that could hit the market if foreclosed on, which would need be managed by government-run Fannie Mae or Freddie Mac, or some other federal housing agency.
Once seized, these so-called real estate owned properties, or REOs, present significant financial challenges to these government agencies, the report said.
“Not only are current REO inventory levels elevated … they may rise over the next several years depending on the number of shadow inventory properties that are ultimately foreclosed on,” the report stated. …
The report said the shadow inventory, which is made up of loans that have been delinquent for at least 90 days, is more than seven times the inventory of REOs that Fannie Mae, Freddie Mac and HUD currently own.
“Even a fraction of the shadow inventory falling into foreclosure could considerably swell … inventories of REO properties,” the report warned.
So the government already has more REO inventory than they can dispose of, and for each property they currently have, seven are waiting to replenish their supply. It shouldn’t be too surprising that defaulting on your home now includes automatic enrollment into a loan modification program. Expect to see the can-kicking behavior of the government entities get even more ridiculous.
So what is the FHA doing about it’s troubles?
In an effort to reduce a potential budget shortfall, the Federal Housing Administration will force homeowners to pay a monthly insurance premium for a longer period. This follows a decision this year to raise the amount of the premiums for all borrowers, the fifth such increase since 2009.
Although the increase in premiums should bolster the agency’s bottom line, it will make things more expensive for borrowers who depend on FHA-insured mortgages, which allows them to make a down payment as small as 3.5 percent of the home’s purchase price.
The insurance premium that buyers pay in addition to their monthly mortgage payment traditionally expires once 22 percent of the principal loan is paid — usually in the first few years of a mortgage. Now, all new loan-takers have to pay the monthly premium for at least 11 years and up to the entire duration of their mortgage, according to the rule that went into effect Monday.
The difference could mean years of paying hundreds of dollars extra a month, depending on the size of the loan.
For those of you who don’t think this will impact you, the FHA insurance premium hikes will impact high wage earners most.
As long as the FHA maintains their monopoly on subprime lending (see: Did the US make FHA into a new Countrywide at taxpayers expense?), they can raise their rates and fees as much as they like. The FHA is counting on their continued monopoly status to force new buyers into paying for the bad loans of the bubble years. Unfortunately, as they raise costs, they provide openings for competitors with private capital to enter the high-risk lending business and steal their market share. As I noted last year, FHA insurance is like taking out a 12.4% second mortgage. At those rates, private lending will step in and cut them out. Without the added income the FHA is counting on, a bailout is all but assured.
The bottom line is that the FHA became the replacement for the untenable subprime lending business model. It was destined to lose money. It was only a matter of how much. This business model would have failed during good times, but operating a subprime model during a protracted downturn in the market was certain to be a huge disaster. If it weren’t, private money would have done it.
The FHA bailout will add to the GSE bailout as another cost of the banking debacle passed off to the US taxpayer. For those of you who rent, you obtain no benefit from this at all, and you are paying a big chunk of the bill.
$730,000 in HELOC abuse
Over the course of six years, the former owners to today’s featured property took their original $150,000 mortgage to $980,000.
WTF did they do with all that money?
They bought this property on 8/1/2001 for $500,000, but they only borrowed $150,000 putting $350,000 of their own money into the purchase. It didn’t take them long to extract it.
On 5/1/2002 they refinanced with a $375,000 first mortgage, and on 11/17/2003 they refinanced again with a $500,000 first mortgage. At that point, they had withdrawn all their equity.
On8/31/2006 they refinanced with a $600,000 Option ARM, and on 1/29/2007 a private party loaned them $300,000. That private lender must have been quite relieved when they refinanced on 5/8/2007 with a new $980,000 first mortgage.
The defaulted in late 2010, and the bank took the property back in May of 2012. The bank sat on it for a year hoping that prices would rise. I guess they feel they can get enough of their money back to liquidate with a minimal loss, so they are finally selling it off.
On Wednesday I reported that home equity spending heightened the housing bubble and compounded the crash. These borrowers obviously would not have lost their home if they hadn’t blown through $730,000. Today they have no money, no house, and bad credit. I hope they enjoyed that $730,000. It may be a while before a bank is stupid enough to give them that much free money again.
[idx-listing mlsnumber=”IV13101783″ showpricehistory=”true”]
$950,000 …….. Asking Price
$500,000 ………. Purchase Price
8/1/2001 ………. Purchase Date
$450,000 ………. Gross Gain (Loss)
($76,000) ………… Commissions and Costs at 8%
$374,000 ………. Net Gain (Loss)
90.0% ………. Gross Percent Change
74.8% ………. Net Percent Change
5.4% ………… Annual Appreciation
Cost of Home Ownership
$950,000 …….. Asking Price
$190,000 ………… 20% Down Conventional
4.40% …………. Mortgage Interest Rate
30 ……………… Number of Years
$760,000 …….. Mortgage
$217,356 ………. Income Requirement
$3,806 ………… Monthly Mortgage Payment
$823 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$198 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$788 ………… Homeowners Association Fees
$5,615 ………. Monthly Cash Outlays
($1,002) ………. Tax Savings
($1,019) ………. Principal Amortization
$306 ………….. Opportunity Cost of Down Payment
$139 ………….. Maintenance and Replacement Reserves
$4,038 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$11,000 ………… Furnishing and Move-In Costs at 1% + $1,500
$11,000 ………… Closing Costs at 1% + $1,500
$7,600 ………… Interest Points at 1%
$190,000 ………… Down Payment
$219,600 ………. Total Cash Costs
$61,900 ………. Emergency Cash Reserves
$281,500 ………. Total Savings Needed