Sep282013
FHA needs bailout as they run out of tricks
The rumor came out that FHA would need a bailout and experts said nonsense. Their “expert” opinion didn’t even last 48 hours.
FHA is mandated to maintain a reserve fund for the mortgages that they insurance. Just as a reminder FHA is government backed insurance agency for low down payment loans for first time homes buyers. After the bubble popped and defaults started occurring, the reserve fund, which had more than enough money in 2007, started to run dry. FHA needed many new borrowers that would pay mortgage insurance premiums which help to replenish the FHA reserve fund. To accomplish this conforming limits were increased and credit scores qualifications were loosen to attract a larger pool of borrowers. Even if you had a existing home if lived in it longer than 5 five you could qualify for a new mortgage. It worked so well that FHA soon filled in the role of the subprime lender and in some markets up to 30% of the newly originated home loans were FHA insured. This was still not enough to stem the losses, so FHA starting to increase the mortgage premiums for new loans. Also, they tried to sell to their non-performing loans to investors to reduce their liabilities. Eventually, the FHA had to increase mortgage insurance premiums over 1.20% for a 30-year fix mortgage and make the insurance permanent over the life of the loan. And these actions still didn’t prevent the bailout.
U.S. housing agency likely to tap Treasury funds -sources
By Margaret Chadbourn
WASHINGTON, Sept 25 (Reuters) – The Federal Housing Administration will likely soon seek a cash infusion from the U.S. Treasury for the first time in its nearly 80-year history to help it cover losses from souring loans, sources familiar with the matter said on Wednesday.
The agency, which offers private mortgage lenders guarantees against homeowner default, has nearly exhausted its reserves for the mortgages it backs. Housing officials have yet to determine how much money the FHA may need to draw, the sources said.
Losses on loans made from 2005-2008 as the market was heading south have eaten away at the agency’s cash reserves. While it is reaping profits from more recent mortgages, those profits are not expected to be large enough to make up the shortfall.
Many conservative Republicans have expressed concern that the FHA provided too much credit to unworthy borrowers during the housing crisis, and they cried foul on Wednesday.
Republicans and Democrats both loved this program, in sense they buying votes by guaranteeing subprime loans.
“The FHA has been going down an irresponsible path for years,” said Senator David Vitter, a Republican member of the Senate Banking Committee. “Instead of managing their funds responsibly, and making appropriate reforms, FHA prefers to lean on taxpayers to bail them out, and enough is enough.
The irresponsible path of was 3% down payment loans. The borrower had no incentive to keep paying the mortgage if they were underwater with their mortgage. Sometimes they had down payment assistance and put almost no money down.
The White House projected in April that the FHA would face a shortfall of $943 million for the fiscal year that ends on Monday, but the agency said it would wait until the end of the budget year to make a decision on whether to draw Treasury aid.
At that time, the FHA said it would see whether or not steps it took to raise funds and the improvement in the housing market would close its funding gap.
Whatever is the initial estimate of the bailout you can be sure that it is way under the final bailout number.
By law, the FHA is able to automatically access Treasury funds if it depletes it reserves, but it has never had to. In the past few years, it has taken a number of actions, including raising insurance premiums and tightening underwriting standards, to stay solvent.
Nice, how many small businesses out there get an automatic line of credit when they start losing money.
The government mortgage insurer plays a key role in helping those with low and modest incomes obtain credit to purchase a home. Consumer advocates maintain the support it has given to low-income borrowers and the housing market as a whole has been worthwhile.
That is not entirely true at this point. A $729,000 loan in Orange County is hardly a loan for a low income household. Again this program morphed to replace the subprime lenders or at least facilitate subprime type lending.
The FHA insures about $1.1 trillion in mortgages and supports 15 percent of all U.S. mortgages, up from about 5 percent in 2006.
It is legally required to keep a 2 percent capital ratio, which is a measure of the fund’s ability to withstand losses. It has failed to meet that threshold for a number of years.
A representative for the Department of Housing and Urban Development, which oversees the FHA, did not respond immediately to a request for comment.
Ironically, it was recent government policies that was a factor for the bailout. As the government increased the mortgage insurance premiums more borrowers started to go to Fannie Mae and Freddie Mae, which were easing their credit standards. As the supply of homes going on the market was suppressed this led to a shortage of homes for sale. In addition the Fed Reserve’s Quantitative Easing lowered mortgage rates and which also indirectly allowed some hedge to borrow cheap money to purchase Single Family Residences as investment vehicles. Finally, the introduction of cash foreign buyers increased the competition and home prices have rallied in 2013. This resulted in the FHA borrower being out bid on these homes and if FHA can’t get new borrowers, it can’t get cash flow replenish the FHA Reserve Fund. Something central planning didn’t foresee.
Mike
FHA-backed mortgages will be halted in a shutdown
If the government shuts down, what happens to all the Uncle Sam-backed mortgages that are in the pipeline? They account for about 90% of U.S. home loans, so reducing that flow could hurt the housing recovery.
The good news is that most government-backed home loans – those purchased and securitized by Fannie Mae and Freddie Mac – will be unaffected by a shutdown. Those companies pay for their operations out of the fees that they charge lenders.
The bad news is that loans guaranteed by the Federal Housing Administration, the Veteran’s Administration and the rural development loans of the United States Department of Agriculture, won’t be processed. If an application for an FHA-insured loan has not been approved by the time of the shutdown, it will have to wait until after the shutdown ends.
FHA-backed loans accounted for 45% of all mortgages used to purchase homes issued in 2012, according to the Federal Reserve. The FHA alone insures about 60,000 loans a month.
“FHA will be unable to endorse any single-family loans and FHA staff will be unavailable to underwrite and approve new loans,” in the event of a shutdown, according to the contingency plan from the Department of Housing and Urban Development, the FHA’s parent agency.
Of the 9,300 employees who work for HUD, only 350 (3.8%) will be able to work, according to a HUD release.
“The housing market is searching for recovery, and we’ve been seeing signs of optimism,” said said David Stevens, CEO of the Mortgage Bankers Association. “This could have a sizable impact on the recovery.”
Many buyers have no alternative to FHA, VA or USDA mortgages. First-time buyers in particular often lack the cash for the large downpayments that other lenders require. FHA rules allow homebuyers to make a downpayment of as little as 3.5% of the selling price — $7,000 on a $200,000 home. A 20% downpayment is normal, which would be $40,000 for that $200,000 purchase.
I never thought about this! Imagine you’re in escrow right now with an FHA buyer. Scary thought…
There seem to be conflicting reports from HUD about what will happen if the government shuts down. One contingency plan says they won’t endorse new loans, another contingency plan says they will. If they do continue to endorse new loans, it’s going to be a log jam with only 350 employees doing the work of 9,300 people.
Maybe not Real Estate related, but jobs which then leads to home buying.
Siemens cuts 15,000 jobs in six billion euro savings drive
(Reuters) – Siemens is to shed 15,000 jobs over the next year, a third of them in Germany, as part of a 6 billion euro ($8.1 billion) cost cutting program, a spokesman said on Sunday.
The announcement comes two months after the ouster of Chief Executive Peter Loescher who drew up the savings plan late last year.
Europe’s biggest engineering firm, whose products range from hearing aids to gas turbines, is anxious to close the gap with more profitable rivals such as U.S.-based General Electric Co and Switzerland’s ABB.
Siemens and its unions have reached an agreement over about half of the job cuts and a deal on the other half will follow, the spokesman said.
He added that Siemens wanted to end speculation in the market about the number of jobs that are about to be cut.
No workers have been laid off so far and Siemens has said it does not intend to make enforced redundancies, relying instead on attrition and voluntary severance deals.
In Germany, about 2,000 jobs will be cut at the company’s industrial unit and another 1,400 at its energy and infrastructure business, the spokesman said.
Siemens expects to close the current fiscal year on Monday with around 370,000 workers, the same as last year. ($1 = 0.7385 euros)
Fed Taper? Net Foreign purchases of US Treasuries in $ Billions
2013 90
2011 500
2009 800
2007 500
2005 280
2003 90
From Lawrence McDonald