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17% of FHA loans delinquent in September, bailout coming

Everyone knew this was coming. The FHA needs a bailout. When the final tally of losses at the FHA come in, everyone will act surprised. Nobody paying careful attention to what the FHA is doing will be shocked. They are absorbing the losses the banks could not by insuring loans with low down payments in a declining market. No private lender or mortgage insurer would do this because the losses would put them out of business. Instead these losses will be absorbed by the US taxpayer — by you.

FHA has been the lender of last resort since its inception. It was started in 1934 during the depths of the Great Depression to provide mortgage lending at a time when private money wouldn’t. The housing market bottomed just as the FHA began, so the FHA loans from the Great Depression didn’t cause large losses. There was almost no other mortgage lending during that period, so it was a welcome jump-start to a beleaguered housing market. The fortuitous timing and positive impact of the lending stimulus made the FHA a success story of its era. Unfortunately, that isn’t the function the FHA played in the collapse of the Great Housing Bubble.

FHA was loaning money when nobody else would, and it did serve as a lender of last resort. However, since housing prices were just beginning their decline, the FHA underwrote a large number of what are now underwater loans. Further, since FHA standards were quite low — it only takes a 620 FICO score to get an FHA loan — the FHA became the defacto replacement of subprime lending. Common sense said if the FHA made mortgage loans in a declining market with tiny down payments to people with spotty credit, they were going to lose a lot of money. That’s why private money wouldn’t make those loans. It’s also why the FHA needs a bailout.

It was obvious these loans were disasters waiting to happen. So why did we do it? To save the banks, of course. Bailouts were designed to benefit banks, not borrowers, and certainly not taxpayers. Government officials like Timothy Geithner bailed out his crony friends like Robert Rubin of CitiBank whose balance sheet was loaded with bad residential mortgage loans. Many of those bad loans were recycled through loan modifications that increased the taxpayer liability, and many properties were sold at inflated to FHA borrowers who fell deeply underwater and defaulted. Loan modification programs and low-down payment FHA loans shifted the losses from the major banks to the US taxpayer. Now it’s time to pay the bills.

FHA Said to Set Stage for Treasury Draw as Losses Mount

By Clea Benson on November 05, 2012

The Federal Housing Administration, faced with continuing losses from the housing bubble, will issue a financial analysis next week setting the stage for what could be its first draw from the U.S. Treasury in its 78-year history, according to three people briefed on the report.

The government-backed mortgage insurer, which warned in last year’s report that its insurance fund was being drained, has raised premiums and tightened credit standards in an effort to avoid asking for a taxpayer subsidy.

Right after the election the FHA is going to Congress to ask for a bailout. Is anyone surprised by either the request or the timing?

Still, the improved quality of recent FHA-backed loans — now comprising 15 percent of U.S. mortgages for home purchases – - may not offset continuing defaults from loans made from 2005 to 2008, said the people, who spoke on condition of anonymity because the report isn’t yet final.

The annual report to Congress, based on analysis by an outside actuary, could hamper a White House effort to expand FHA’s role as an insurer for borrowers whose homes are worth less than they owe on them. FHA officials and supporters are preparing to counter the downbeat projections by highlighting how the agency helps the economy.

I find those bogus, after-the-fact justifications for policy infuriating. If taxpayers were told back in 2008, “We are going to transfer losses from the banks to the government and attempt to prop up crashing home prices,” what would the result have been? Overwhelming voter support? I rather doubt it. Instead, the FHA did their dirty deed, then they justify it later with bullshit about how they saved the world. Disgusting.

“If FHA alone simply stopped doing business, we would have been propelled down into another double-dip recession,” said John Griffith, an analyst at the Center for American Progress, a research organization aligned with Democrats. …

Nonsensical straw-man argument. Nobody suggested we completely shut down the FHA. The FHA could have operated and maintained high underwriting standards. The result would have been fewer bad loans and less losses shifted from banks to taxpayers.

The FHA’s troubles stem from rising defaults on mortgages it insured during the peak years of the housing bubble. The agency now insures about 7.6 million loans with total outstanding balances near $1.1 trillion, triple the amount it backed five years ago.

The agency could cover its costs in the past because revenue from its insurance premiums exceeded claims. This year, it avoided taking a taxpayer subsidy despite mounting claims because it received a one-time payment of almost $1 billion from a legal settlement over claims that mortgage servicers botched foreclosures.

In an effort to disguise the problems at the FHA and delay the request for a bailout until after the election, the government got a billion dollars back out of the banks. A small price to pay for the hundreds of billions of bad loans the FHA recycled for them.

The agency’s financial report last year projected that loans issued before 2009 would result in $26 billion in losses, $14 billion of that from a subset of loans in which sellers were allowed to cover the down payment on behalf of the buyer, often by inflating the price of the house. Congress banned seller-funded down payment loans beginning in 2009.

Seller kick-backs were the primary way homebuilders did business prior to the change. A homebuilder would donate the money to a compliant charity that would then make the down payment on behalf of the borrower. The elimination of this program brought down payments back to the whole market and caused homebuilder sales to continue to plummet. Obviously, with the high default rates and losses, discontinuing this program was the right thing to do despite the arguments raised by homebuilders.

Still, the risk of many of those mortgages has been transferred to the agency’s more recent books of business because they have been refinanced under FHA’s streamline program, which waives many underwriting requirements to enable borrowers to take advantage of low interest rates. More than 17 percent of all FHA loans were delinquent in September.

That is an astonishingly high number. No wonder the FHA needs a bailout. I wonder what the underlying collateral is worth? The foreclosure losses will be breathtaking.

FHA’s finances rebounded, at least temporarily, after it increased insurance premiums on new single-family loans in April by 75 basis points to 1.75 percent of loan amount. In August, the agency predicted it would end fiscal-year 2012 with $3 billion in its reserve account.

1.75% is nearly double the property taxes here in California. It was bad enough when the FHA insurance equaled the taxes. These rising costs are making the FHA loan much less attractive than it used to be.

The agency’s 2012 report is expected to be more pessimistic than last year’s partly because it is changing its economic modeling, according to three other people briefed on the procedures. This year’s report, based on the work of an independent actuary, is expected to include less rosy expectations for home prices and a revised assessment of loans from earlier years that have been refinanced more recently.

LOL! They are getting an impartial outside consultant who will tell them the truth rather than publishing their overly-optimistic borderline-bullshit internal projections. It’s pretty obvious last year’s projections were public relations nonsense attempting to kick the can on a bailout until after the election.

‘Stimulus Program’

FHA has been used by the Realtors, by the homebuilders and by the administration as a stimulus program rather than as a responsible lending program,” said Ed Pinto, a frequent critic of FHA’s accounting methods who is a resident fellow at the American Enterprise Institute, which advocates free markets.

That’s exactly what the FHA was used for. Everyone in real estate looked to the FHA as a savior. Without the FHA, realtors would have generated fewer commissions, homebuilders would have sold fewer homes, and the politicians would have coped with more unpopular foreclosures. Given those pressures, it isn’t surprising the FHA was made to keep standards too loose for too long. It also shouldn’t be surprising that the FHA needs a bailout.

What form would an FHA bailout take?

Even if the FHA requires a bailout, it probably won’t result in the loss of taxpayer funds. The government will likely make the FHA a bridge loan at 0% interest against future premiums. This will make the FHA solvent while they earn their way back to health. Once prices start rising, the default losses will decline, and eventually, the fund will have more coming in than going out. If the government makes the FHA a bailout loan, which seems likely, the premiums will have to remain high for a little longer to pay off the loan. In the end, the taxpayer will not end up losing money, but future FHA borrowers will be paying the losses on bubble era loans through higher premiums for quite some time. Perhaps that’s a good thing because higher FHA loan premiums and costs will provide an opportunity for private lending to take market share, and ultimately, that’s what we all want.

The Orange County HELOC abuse stereotype

When I create my over-the-top cartoons, I hope to dramatize a point about how real people live in Orange County. HELOC abuse and dependency is a way of life here, and quite honestly, I don’t see any societal value in it. We subsidize these people’s entitlements though housing subsidies and bailouts, and what do they offer in return? Their stimulus spending? Thank you, but I would rather keep my tax dollars and stimulate the economy on my own.

As you read through the details of today’s daily debtor debacle, ask yourself how giving these people $400,000 and letting them squat for three and half years benefited you.

  • Today’s featured property was purchased on 7/21/1988 for $265,000. Their original mortgage information is not available.
  • On 8/4/1997 they obtained a $31,000 stand-alone second.
  • On 6/26/1998 they refinanced with a $242,000 first mortgage.
  • On 1/26/2000 they opened a $43,000 HELOC.
  • On 10/16/2001 they refinanced with a $337,500 first mortgage.
  • On 11/10/2003 they obtained a $200,000 HELOC.
  • On 7/9/2004 they refinanced with a $340,000 first mortgage.
  • On 2/16/2005 they opened a $250,000 HELOC.
  • On 7/24/2006 they refinanced with a $650,000 first mortgage.
  • On 7/24/2006 they obtained a $25,000 stand-alone second.
  • On 2/13/2007 they refinanced with a $648,000 first mortgage.

They quit paying the mortgage in early 2009, and they were served a notice of default on 6/4/2009. The bank did not foreclose until 8/8/2012, more than three years after they quit paying.

“The free money was great, but avoiding the house payment is steady and reliable.”

[idx-listing mlsnumber="S716522" showpricehistory="true"]

Proprietary OC Housing News home purchase analysis

26466 EL MAR Mission Viejo, CA 92691

$579,900    ……..    Asking Price
$265,000    ……….    Purchase Price
7/21/1988    ……….    Purchase Date

$314,900    ……….    Gross Gain (Loss)
($21,200)    …………    Commissions and Costs at 8%
$293,700    ……….    Net Gain (Loss)
118.8%    ……….    Gross Percent Change
110.8%    ……….    Net Percent Change
3.2%    …………    Annual Appreciation

Cost of Home Ownership
$579,900    ……..    Asking Price
$115,980    …………    20% Down Conventional
3.45%    ………….    Mortgage Interest Rate
30    ………………    Number of Years
$463,920    ……..    Mortgage
$105,207    ……….    Income Requirement

$2,070    …………    Monthly Mortgage Payment
$503    …………    Property Tax at 1.04%
$0    …………    Mello Roos & Special Taxes
$145    …………    Homeowners Insurance at 0.3%
$0    …………    Private Mortgage Insurance
$0    …………    Homeowners Association Fees
$2,718    ……….    Monthly Cash Outlays

($321)    ……….    Tax Savings
($737)    ……….    Equity Hidden in Payment
$126    …………..    Lost Income to Down Payment
$165    …………..    Maintenance and Replacement Reserves
$1,951    ……….    Monthly Cost of Ownership

Cash Acquisition Demands
$7,299    …………    Furnishing and Move In at 1% + $1,500
$7,299    …………    Closing Costs at 1% + $1,500
$4,639    …………    Interest Points
$115,980    …………    Down Payment
$135,217    ……….    Total Cash Costs
$29,900    ……….    Emergency Cash Reserves
$165,117    ……….    Total Savings Needed

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