Yesterday I described How to game the system with FHA loans for maximum advantage. Today, I want to look at the cost of that financing. It's up to you to determine whether you believe the benefits are worth the costs. Many have quipped that FHA has become the replacement for subprime. They have very low standards for qualification (a 580 FICO score), a very low down payment requirement (currently 3.5%), and as a result, they have become the loan-of-necessity for anyone who doesn't have the credit requirements or the down payment necessary to obtain other financing. In other words, they have stepped into the void left by the collapse of subprime lending. The FHA insurance premium is a direct measure of…[READ MORE]

Our current housing finance system is a mess. It's laden with moral hazard, and likely to implode with enormous losses to be absorbed at taxpayer expense. All our current policies are geared toward saving our banking system from financial ruin and making loan owners comfortable with their fate. As with any policy initiatives that distort the natural market, the current system is loaded with unintended incentives that permit people to game the system for their personal advantage. Today we look at how using an FHA loan to game the system provides advantages that offset the high cost of the FHA insurance. In Monday's post, Loan modification defaults soar 24%, can-kicking fails, I found a very astute observation from an industry…[READ MORE]

When people are victims of theft, they usually work to remedy the situation so the theft doesn't happen again. If a thief breaks into someone's house, the homeowner installs better locks or alarm systems to avoid a future loss of property or worse. However, when the crime is more complex than breaking-and-entering, or when the government is the facilitator of the crime, it can be much more difficult for the victims to protect themselves, but it's just as necessary. The Big Steal I have written that Moral hazard is the central issue in the housing bust. My reasoning is simple. If we let bankers and borrowers get away with stealing from taxpayers, both of those groups will work hard to…[READ MORE]

One of my earliest posts in May of 2007 was about the impact future loan terms have on future home prices. Most people just assume house prices always go up. Their faith was shaken by a precipitous decline over the last six years, but once the bottom is securely in the rear-view mirror, kool aid intoxication in faith-based appreciation will undoubtedly return. I want to revisit the idea of future house prices depending on future loan terms because it makes a strong case for weak home price appreciation going forward. The how and why matters, and before kool aid takes hold again, it pays to understand what it would take for house prices to go up from here. Over the…[READ MORE]

Whenever I make a prediction that goes against the conventional wisdom, I take the risk of looking the fool. On those occasions when I am right, it's very satisfying. Even though I know I shouldn't, internally, I enjoy a silent I-told-you-so. Almost four years ago now, lenders embarked on their plan to modify loans to get people over the "rough patch" caused by the recession. From the beginning I said these programs would fail largely because the people being helped simply couldn't afford their homes. They were Ponzis. When a borrower has gone Ponzi, the "rough patch" is when they are cut off from more Ponzi borrowing. Their diminished income has nothing to do with lower wages they earn due…[READ MORE]

Today is part 4 in the ongoing series on Ownership Cost: Ownership cost: income, payments and house prices Ownership cost: interest rates and down payment requirements Ownership cost: property taxes, insurance, Mello Roos, and HOAs Ownership cost: taxes and opportunity costs Four Major Variables that Determine Market Price Over the last four days we looked at the four main variables that determine home price: borrower income, allowable debt-to-income ratios, interest rates, and down payment requirements. Today we are looking at tax implications and opportunity costs because these number will give you a more accurate measure of the impact home ownership will have on the owner’s financial life. Taxes Owning real estate has two significant tax benefits: (1) favorable capital gains…[READ MORE]

Today is part 3 in the ongoing series on Ownership Cost: Ownership cost: income, payments and house prices Ownership cost: interest rates and down payment requirements Ownership cost: property taxes, insurance, Mello Roos, and HOAs Ownership cost: taxes and opportunity costs Four Major Variables that Determine Market Price Over the last two days we looked at the four main variables that determine home price: borrower income, allowable debt-to-income ratios, interest rates, and down payment requirements. Today we are looking at some of the minor cost inputs that work by influencing the major ones; property taxes and Mello Roos taxes, HOAs, and insurance. PITI lenders have an acronym called PITI, which stands for principal, interest, taxes, and insurance.To that we can…[READ MORE]

Today is part 2 in the ongoing series on Ownership Cost: Ownership cost: income, payments and house prices Ownership cost: interest rates and down payment requirements Ownership cost: property taxes, insurance, Mello Roos, and HOAs Ownership cost: taxes and opportunity costs Four Major Variables that Determine Market Price Yesterday, we discussed the four variables that determine the purchase price of a property: borrower income, allowable debt-to-income ratios, interest rates, and down payment requirements. Today we are looking at interest rates and down payment requirements. Interest Rates Interest rates go up, and interest rates go down. Interest rates are the yield on debt instruments. If investors lose their appetite for mortgage debt, prices of mortgage-backed securities goes down, payment yields go…[READ MORE]

I revisited my post on Rent Versus Own where I talked about the cost of ownership. Many of the questions people have about our Cost of Ownership analysis are related to the various cost inputs and how they impact values. Therefore, I want to take each of these costs and talk about them in more detail. In order to do this in a logical flow, I have broken this task into a series of four posts that will be debuting all this week. These posts are: Ownership cost: income, payments and house prices Ownership cost: interest rates and down payment requirements Ownership cost: property taxes, insurance, Mello Roos, and HOAs Ownership cost: taxes and opportunity costs Four Major Variables that…[READ MORE]

The need for shelter is basic, often closely followed by the desire for community. In the United States, this often translates into a desire to take on a very large mortgage to buy real estate. These basic human emotions drive much of the activity in real estate markets. Most people buy because it is the right time for them. Their career, age, family circumstances all come together to push people toward ownership at different times. Some are fortunate and buy at the bottom of the real estate cycle. Some are not so fortunate and buy at the peak. The most damaging aspect of our current system is the price volatility. It capriciously rewards some and destroys others. Home price volatility…[READ MORE]