Sep282015
FHA insures subprime loans with explicit government backing
If the FHA insurance fund falls short, the US taxpayer will pay the difference. With the FHA insuring subprime loans, as a taxpayer, your money is at risk.
Many mortgage industry observers quipped that FHA is the reincarnation of subprime lending; the facts support this assertion. The FHA has very low standards for qualification (a 580 FICO score), a very low down payment requirement (currently 3.5%). Consequently, FHA insured loans became a necessity for anyone without the credit score or down payment to obtain other financing. 
Clearly, FHA filled the void created by the collapse of subprime lending.
For the subprime business model to work, lenders much charge higher interest rates and fees to offset the losses on the numerous loans certain to go bad. I reported in 2013 that the FHA increased their fees so high they became a predatory lender. By 2014 the high cost of FHA loans caused originations to plunge, so I predicted that pressure would mount to lower FHA fees. Not long thereafter, the FHA did lower its fees, and it’s one of the main reasons sales are higher this year.
The fact remains that FHA loans are the new subprime, and Kevin Watters, CEO of Chase Mortgage Banking had the courage to say so.
Did Chase Mortgage CEO get it wrong to call FHA lending subprime?.
Edward J. Pinto, September 25, 2015
Recently Kevin Watters, CEO of Chase Mortgage Banking, compared low FICO, low down payment FHA loans to subprime. While he conflated a couple of FHA’s underwriting criteria, the fact remains that FHA’s core 30-year loan program allows borrowers with a down payment of 3.5% to have a FICO score as low as 580, along with a total debt-to-income ratio of 50% or more.
I find it increasingly annoying when real estate industry shills conclude every statement with the repetitious lie that lending standards are too tight. Mortgage lending standards are not tight, and the bullshit needs to stop.
These loans are subprime based on risk, having an AEI mortgage default risk score under stress of 40%.
These are subprime loans based on history: the indicia of subprime have long been impaired credit as represented by a FICO score of less than 660 or a total debt ratio of greater than 42%.
Finally, FHA loans are subprime based on marketing. One of FHA’s major lenders, Carrington Mortgage, ran an advertisement stating – (emphasis added) – “We have loan programs specifically tailored to credit-challenged borrowers so there is no need to turn away those borrowers with low FICO scores.”
Today, one third of FHA’s borrowers has a FICO score less than 660,
Let that sink in: 1/3 of FHA borrowers have FICO scores under 660. Remember, as a taxpayer, you are on the hook if these people quit paying and the FHA insurance fund doesn’t have the money to cover the losses.
with Carrington having the lowest median FICO score — at 620— of any of FHA’s major lenders. Today, nearly half of FHA’s borrowers have a total debt ratio of greater than 42%.
Do you remember the 43% debt-to-income ratio cap created by Dodd-Frank? Well, FHA is exempt from that requirement, and they now provide oversized loans to over half their customers. This is a government agency “helping” people drown in debt.
Kevin Watters was right; much of FHA’s lending is subprime.
Will subprime mortgage lending 2.0 be a disaster? Let’s hope not.
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.
FHA loans as a stoploss
Back in 2006 when I started publicly warning people not to buy homes due to the impending crash, I pointed out to people that there is no stoploss protection in event of a major decline in prices. Leverage works both ways, and the people who were making huge money on small investments were enjoying stellar returns. However, if prices go the other way, the losses are even more brutal.
Another commonly leveraged investment is stocks. People in a margin account can buy twice as much stock as they can afford by borrowing money from their broker. In the event stock prices collapse, the broker will close out an investor’s position before the account goes negative to preserve their original loan capital. There is no such stoploss protection in residential real estate. If house prices go down, people lose money until prices stop going down. They can easily lose many times their original down payment investment.
Well, at least that used to be true…
Now in an era of short sales as an entitlement, borrowers and speculators have no downside risk beyond their initial down payment. If values go down, people simply petition for a short sale, and the lender absorbs the loss. And when that loan is an FHA loan, the lender simply passes the loss on to the US taxpayer.
The incentive here is clear. Everyone should put the minimum possible down payment on a property to minimize their own exposure. If prices go down, they can petition for a loan modification, a short sale, or simply strategically default with no financial repercussions.
This system needs to be changed
The above is the best advice I can give a buyer in today’s market — and that pains me. It’s terrible that our system encourages both bankers and buyers to pass their losses on to the US taxpayer. As one of them, it’s infuriating to see how our government’s policies to coddle the banks has created a system where both bankers and borrowers can pass their bad bets on to all of us.
Unfortunately, that’s the reality of life.
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Wall Street’s big bet on housing isn’t paying off
http://fortune.com/2015/09/25/housing-wall-street-investment/?xid=yahoo_fortune
This report makes a few mistakes that renders its conclusions suspect.
First, the value reported is minus debt, but no debt was used for the acquisition. The debt was applied later as a cash-out tool that recouped most if not all the original investment capital. Thus, any return calculations based on the original investment are wrong because that original capital is no longer deployed in this investment.
Second, the idea that a cashflow positive investment becomes a loser due to depreciation is crazy. These guys are making money and paying no taxes, a win-win for the investors.
Third, the returns are much better than corporate bonds because the underlying collateral won’t lose value when interest rates rise like a long-term bond will.
These early investors put up a lot of cash, got their cash back when they applied debt when they created these REITs, and now they earn strong cash returns with no taxes.
Seems like the bet is paying off to me.
Well said, I believe this is part of the reason foreigners are choosing US real estate over US bonds but it is more complicated than that with money laundering and foreign instability.
The US bond rally will eventually end poorly, while US real estate has upside even with interest rates rising. Especially true if cash flow where rents will rise dramatically with interest rates.
“US real estate has upside even with interest rates rising” ?? Ha!
Current bank reserves(ie govt bonds) continue to be valued/priced as risk free, which means they do not reflect actual market conditions. Thus, as the US bond rally ends poorly (as you’ve proclaimed), risk premiums will widen dramatically NOT fall, which will push RE down down down along with rents.
Risk premiums can absolutely fall in that scenario, you have no clue what you are talking about.
Zerohedge is feeding you a spoonful of poison every day, killing you one spoonful at a time.
Dude… too funny!
FYI, risk premium v. asset price is an INVERSE relationship.
If the cost of financing rises faster than wages, real estate could go down, particularly if any of the big funds that hold these properties decide to dump them.
It looks to me like the PE firms are making money, but the bonds are sold to other investors, who are looking at how much the bonds, not the PE firms, are making. That looks less good.
Also the PEs did borrow for their investments. Waypoint, for instance, got their cash from Citi, while Blackstone borrowed from Deutsche Bank. I don’t know what the interest rates were, but they may have packaged the “mortgages” on the properties at x% and pocketed the difference between the interest rate they paid and what they’re assigning to the bonds.
Yes, the investors who bought out Blackstone’s interest in these properties probably aren’t doing very well, but then again, Blackstone doesn’t care because they cashed out. For them, if they make anything more from holding a residual interest, it’s just gravy.
Renting Seniors Screwed by ZIRP
The national average of rental rates for a single-family, three bedroom home rose 6.1% this year, and for many watching the housing space that immediately calls into question the implications for cash-strapped Millennials.
But what about retiring Boomers?
Info from RentRange and Real Property Management shows the average rent for a three-bedroom, single family home is $1,320.
Which, they note, is a problem for a number of retiring Boomers because on average, people over the age of 55 have saved only $150,000 for retirement.
“This savings will generate $500 per month in income, if only the recommended 4% withdrawal standard is followed,” says Don Lawby, president of Real Property Management.
In addition to the benefits from social security, that makes the average monthly income just $1,794 or $21,528 per year, information they provided shows.
“So if 34 to 38% of income is spent on housing, then the average retiree will have a housing budget of just $610 — $682 per month — half of today’s average single family rental,” Lawby says. “The future will look even bleaker if housing costs continue to increase at an average pace of 2.4% each year. By 2030, there will be more than 70 million Americans over the age of 65 and the average rent for a three bedroom single family home will be $1,830 – more than the entire monthly income retirees will earn.”
Will a Lending Industry Shill Become Speaker of the House (Pun Intended)
Will Rep. Hensarling Seek to Become the Next Speaker of the House?
“The job of Speaker of the House is tough, and at times, a thankless one,” Hensarling said. “John Boehner has tirelessly served his country and party, and I honestly don’t think Republicans would have reclaimed the majority in 2010 if it weren’t for his vision and determination to achieve what everyone said couldn’t be done. I believe his decision today was a noble act of selflessness, and I wish him and his family well.”
Many are speculating that Boehner’s deputy and current House Majority Leader Kevin McCarthy (R-California) will take over the Speaker role. Hensarling, who has represented Texas’ 5th District since January 2003 and served as Chairman of the House Financial Services Committee since January 2013, is another possible candidate to replace Boehner. There is another possibility for Hensarling, however—if McCarthy replaces Boehner as Speaker of the House, that will leave a vacancy for House Majority Leader, which could be filled by Hensarling.
Sarah Rozier, spokesperson for Hensarling, said in an email to DS News that, “Chairman Hensarling is weighing his options and I expect he will have a decision by early next week.”
As Chairman of the House Financial Services Committee, Hensarling has been a major figure in housing finance reform for almost three years. He has been an outspoken opponent of the Dodd-Frank Wall Street Reform Act, having recently chaired a series of three hearings in the Committee on the impact of the controversial law five years since it was enacted.
In the last of those three hearings, which took place on September 17, Hensarling said, “Dodd-Frank erodes the economic freedom and opportunity that empowers low income Americans to rise and generate greater shared prosperity. Dodd-Frank moves us away from the equal protection offered by the impartial rule of law towards the unequal and victimizing rule of political bureaucrats. Of all the harm Dodd-Frank inflicts, this is the most profound and disturbing.”
The next Speaker gets to deal with the small, but crazy, Freedom Caucus of the Republican Party that thinks abortion, contraceptives, and the Affordable Care Act are the biggest issues/obstacles the US is facing. Good luck. It’s hard to reason with crazy.
In the past, the mouthpieces for the crazies were shameless pandering liars who knew they were lying because it gave them power. They were back-room dealmakers who worked with the establishment. The new breed really believes the nonsense they spout, which is far more scary, and much harder to deal with.
Perspective meet straw man. 😉
California Home Prices up 50% in 3 years
http://www.bkfs.com/Data/DataReports/BKFS_HPI_Jul2015_CA_hi_res.jpg
* U.S. home prices were up 0.4 percent for the month, and have gained 5.3 percent from one year ago
* At $253K, the national level HPI is now just 5.5 percent off its July 2006 peak of $268K, and up nearly 27 percent from the market’s bottom in January 2012
http://www.bkfs.com/Data/DataReports/BKFS_HPI_Jul2015_US_hi_res.jpg
O.C. wages up 9 percent, nation’s 5th largest hike
http://www.ocregister.com/articles/percent-684725-year-orange.html
The start of the year was very good for Orange County paychecks.
A little-followed federal employment measure – perhaps unpopular because it is produced with a significant lag – shows Orange County average weekly wages rose $101 to $1,221 in the 12 months ended in March. That stunning 9.1 percent growth rate was the fifth biggest percentage-point jump among the 342 counties tracked nationwide and the largest increase among the nation’s 10 counties with the largest numbers of jobs.
The report, compiled by the U.S. Bureau of Labor Statistics from employers’ unemployment insurance paperwork, shows Orange County workers are in a fortunate spot. Nationwide, average weekly wages rose at just a 2.1 percent annual rate to $1,048 in March.
Statewide, wages rose by 3.7 percent to $1,207 – third best among the states, behind only Minnesota and North Dakota.
Not that a 9 percent pay boost needs much perspective, but it tops Orange County’s previous biggest jump – 8.2 percent in the first quarter of 2006. It’s further proof that employers are finally being forced to pay up to attract and retain talent and keep their expanding businesses humming. Orange County’s unemployment rate averaged 4.7 percent in the past year, the lowest since 2008.
Yet Chapman University economist Esmael Adibi found one big mystery in the new wage report: Was local compensation soaring due to employees working extra hours or bosses handing out what’s been rare – significant pay raises?
Local weekly wages rose 3 percent in 2014, the largest rise since 2007, after falling slightly the previous year.
“An extra $100 a week for a million-plus workers is a lot of money,” said Adibi, noting the huge economic boost the recent wage hike creates for the region no matter how the workers earned it. Local wages in the first quarter of this year were $2.7 billion higher than 2014’s first quarter.
The local pay boom was powered in good part by a 28 percent jump for the 279,000 Orange County workers in professional and business services. Adibi says wages can surge for this industry early in the year when workers – such as tax preparers, for example – are busy.
Others enjoying healthy pay increases included the 251,000 local transportation and utility workers, whose average pay increased 7.2 percent in a year; the 114,000 finance workers, who got a pay increase of 6 percent; and the 25,000 information workers, who got 6.5 percent.
This same report did reveal one possible trouble spot.
Federal employment figures show Orange County’s year-over-year job growth at 2.5 percent as of March – roughly a full percentage point lower than the estimate of Orange County job growth produced by California employment trackers.
But even if job growth proves to be less robust than we think, 2.5 percent more jobs represents a pretty swift hiring spree that’s bound to keep wages going higher.
If true, it bodes well for house prices.
It could also be a bad data point or different employers moving in to the area.
If low paying jobs leave and high paying jobs enter the area, aggregate wages go up even if the individuals living there see no raises at all.
Mortgage Rates Lower Following Fed’s Hike Deferment
Mortgage rates lowered to 3.86 percent for the week ending September 24, 2015 after the Federal Reserve decided to keep interest rates near zero last week.
Freddie Mac’s Primary Mortgage Market Survey (PMMS), showed that the 30-year fixed-rate mortgage (FRM) averaged 3.86 percent with an average 0.7 point for the week. This rate is down from last week when it averaged 3.91 percent, and a year ago at this time, it averaged 4.20 percent.
“Global growth concerns and lackluster inflation convinced the Fed to defer a hike in the Federal funds rate,” said Sean Becketti, chief economist, Freddie Mac. “In response, Treasury yields fell about 9 basis points over the week, with some larger day-to-day swings along the way. In response, the interest rate on 30-year fixed rate mortgages dropped by 5 basis points to 3.86 percent.”
The report also found that the 15-year FRM averaged 3.08 percent with an average 0.6 point, a decrease from last week when the rate was 3.11 percent. One year ago, the rate averaged 3.36 percent.
The bad news isn’t close to over for the housing sector
Adding to the uncertainty surrounding the American economy in general and the housing sector in particular, is the reporting by Jackie Stewart in Mortgage Servicing News recently, “Bad Loans Remain Well Above Pre-crisis Levels.” In her article, Stewart notes that the banking industry continues to sit on a mountain of problematic loans seven years after the onset of the financial crisis.
Further, and I quote, “Credit quality, to be sure, is substantially better than it was during the peak of the crisis. But the amount of nonperforming assets on bank’s books is more than triple the levels reported in 2006.”
Does this sound like the housing sector is or has been in a real recovery? Yes, I know, rhetorical, indeed.
Presciently, an executive from the banking arena is quoted in the piece as stating the obvious that the banking system and our economy would have recovered faster if there had been much more emphasis placed on disposing bad assets, rather than institutions managing them.
As I have stated a number of times, if the federal government had not heavy-handedly jumped in with foreclosure moratoria, HAMP, HAFA and many other foreclosure alternative or delaying programs purported to benefit consumers, the private sector would have dealt more swiftly with the housing crisis. We would certainly have felt the pain, but it would have been over sooner, as in every other recession in our nation’s history. Instead of pulling off the metaphoric band-aid quickly, we continue to suffer from the drip, drip, drip of a kind of water torture…”
Despite the Housing Recovery, Thousands of Homes Are Still Losing Value
Years after the end of the recession, entire metro areas still find themselves left behind by the economic recovery. Nationwide, more than one-quarter of homes lost value over the last year. In some metro areas, the drop-off has been even more severe. Some housing markets are approaching housing values not seen since the height of the housing bubble—while other housing markets badly need a recovery from the recovery.
Several metro areas saw more than one-third of their homes lose value this August compared to one year ago, according to a report from Zillow. Most of the metro areas with a high percentage of homes losing value are congregated in the Midwest and Northeast, including Cleveland (where 31.5 percent of homes dipped in value), Cincinnati (32.6 percent), Chicago (35.8 percent), Pittsburgh (37.1 percent), and New York (38.6 percent).
Three metro areas saw enormous drops in home values year over year: Washington, D.C. (41.2 percent), Philadelphia (43.4 percent), and above all, Baltimore (48.1 percent).
In terms of housing, the recovery looks a lot like sorting. In major metro areas in Texas and California, the recession is most definitely over—it’s like it never happened! For other markets, the recovery has either wound down or has yet to truly arrive. Renters may have a clearer shot at homeownership in cities where housing values are low or falling. But can they find any work?
Though this story is despicable, it made me laugh.
Avoid foreclosure! Go see the Archbishop
San Diegans involved in $8 million mortgage fraud
People fearful of losing their homes through foreclosure were told they should consult the Archbishop of Shon-Te-East-A, Walks with Spirit, a group claiming to be a spiritual organization dedicated to helping people dodge foreclosure. A federal grand jury in Sacramento indicted seven people on charges of conspiracy, bank fraud, false making of documents, and money laundering.
The indictment was unsealed Thursday (September 24). One of the seven was Ramus Kirkpatrick, formerly of Oceanside. Two San Diegans, Tisha Trites and Todd Smith, pleaded guilty earlier this month and agreed to help the prosecution. Oh, yes: the Archbishop, John Michael DiChiara, was from Nevada City.
The indictment charges that once homeowners were enrolled in the program, fictitious deeds of trust and reconveyance were created. The defendants allegedly obtained profits of $8 million through the program, attempting to extinguish more than $60 million in mortgage loans.
[…] Yes. That’s true. (See: FHA insures subprime loans with explicit government backing) […]