Sep302014
High loan costs cause FHA originations to plunge
FHA loan originations are plunging because high borrowing costs turn off potential buyers, and risks of put-backs make lenders reluctant.
The biggest barrier to first-time homebuyers is saving for a down payment. As a result, most first-time homebuyers turn to the FHA because the FHA only requires 3.5% down, but as everyone who’s gone down that road also quickly learns, FHA financing is expensive; in fact, FHA financing is so expensive, it’s like taking out a 12.4% second mortgage!
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 stepped into the void left by the collapse of subprime lending.
Under direction from politicians to save the housing market, the FHA ignored the real cost of mortgage risk for years as house prices collapsed, and as a result, they face a government bailout. As the losses mount, reality set in at the FHA, and they continually raise the cost of their insurance to cover the losses from their bad loans. This increased insurance cost adds to a borrowers cost of financing, and it serves as a proxy for raising interest rates on borrowers using FHA financing.
The FHA insurance premium is a direct measure of repayment risk divorced from interest rates. Ordinarily, this risk is rolled up into the interest rate, which is why subprime loans used to carry a higher rate. However, FHA loans have the same interest rate as prime customers. Since the FHA insurance premium is an added borrower cost, with a little math, we can calculate the effective interest rate on an FHA loan and see the incremental cost of that last 16.5% of the mortgage is about a 12% interest rate.
The high cost of FHA financing is one of the many reasons first-time homebuying participation is near record lows. And since these high FHA fees are necessary to properly price risk and make the FHA solvent, unless Congress wants to massively bail out the FHA, the fees will stay high for the foreseeable future.
FHA Loans Plunge 19% as Lenders Haggle With Officials
By Alexis Leondis Sep 19, 2014 12:00 AM PT
… Federal Housing Administration loans, given to borrowers with weaker credit scores and requiring small down payments, plummeted 19 percent in the nine months ending June 30 compared with a year earlier. …
A big part of this drop was expected as refinance volume dried up, but purchase originations are down significantly as well.
The largest U.S. home lenders are curtailing FHA mortgages because of concerns that they will be penalized for what they consider immaterial underwriting errors when loans default.
JPMorgan Chase & Co. (JPM), Bank of America Corp. and other lenders have paid more than $3 billion in fines for originating faulty FHA loans during the housing bubble following lawsuits brought by the Department of Justice and state attorneys general. Julian Castro, secretary of the Department of Housing and Urban Development that oversees FHA, said the agency wants to ease credit by rewriting its handbook to clearly spell out when lenders can be forced to bear the cost of soured loans.
“A big issue is the DOJ settlements and their impact on the lending attitudes of the banks, which is clearly the elephant in the room,” said Brian Chappelle, a former FHA official and partner at Potomac Partners LLC, a consulting firm for lenders in Washington. “The government is worried about access to credit. They’re looking at volume numbers and they know it’s a serious problem.”
Fighting over put-backs will go on for years. Lenders want to originate as much as possible to generate fees, and the fear of loss from put-backs is the only check-and-balance in the system to prevent them from lowering standards to zero like they did during the housing bubble.
The more stringent the put-back rules, the less risk of loss the US taxpayer absorbs, but the fewer loans lenders originate. I anticipate there will be some relaxation of these rules in the next few years, but with the huge financial problems facing the FHA, these rules won’t loosen too much, and in the grand scheme of things, Congress would rather see the market share of FHA dwindle and help private lending take up the slack.
FHA insured 420,709 purchase loans in the nine months through June 30, compared with 516,588 mortgages during the same period a year earlier, according to HUD data. A record 1.1 million loans were backed by FHA in the 12 months ending Sept. 30, 2010. The annual average for the prior 10 years was 589,242. …
So based on those numbers, the FHA is originating the same number of loans as they averaged during the previous 10 years. What’s the problem here? If loan origination volume is the issue, then private lenders need to increase their activity, either through portfolio lending or securitization.
Defaults on these mortgages led to losses that forced the FHA to take a $1.7 billion taxpayer bailout last year — the first in its 80-year history.
This is why standards won’t loosen much.
In 2013, 39 percent of first-time buyers used FHA loans, which generally require 3.5 percent down, compared with 56 percent in 2010, according to data from the National Association of Realtors.
“Access to credit is tightening across the board and the number of people who can get a home is shrinking to the point of code red,” said Anthony Hsieh, CEO of LoanDepot.com, the third largest FHA lender.
Bullshit, Despite industry spin, mortgage lending standards are not tight.
A dearth of first-time buyers is pushing down the national homeownership rate, which fell in the second quarter to its lowest level since 1995, according to Census Bureau data.
(See: Home ownership rate hits new lows)
Higher FHA mortgage insurance premiums are also depressing demand for its loans and the ability of homebuyers to qualify for them. Borrowers must now pay an up-front fee of 1.75 percent of the loan balance and up to 1.35 percentage points in annual mortgage-insurance premiums.
If FHA’s financial report, which will be released later this year, shows the insurer is in better fiscal health, there will be pressure to reduce premiums, said Lawrence Yun, chief economist at NAR.
There will be pressure, but it will be largely ignored.
“There hasn’t been anything like this weak recovery we’ve had over the last five years, …” Weicher said.
It wouldn’t have been so weak if we had purged the bad debts and hit the reset button. Boomerang buyers would be more active and first-time buyers would also be more excited about real estate if prices were back at 2012 levels. But the banks needed to preserve their solvency, so the powers-that-be reflated the housing bubble, and now they feign surprise that buyers aren’t thrilled about paying sky-high prices. Idiots.
Despite the high costs of FHA financing, for those with no moral compunction against strategic default and passing losses on to their taxpaying neighbors, FHA financing offers some unique benefits.
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.
The cost of an FHA loan can be viewed as stoploss insurance, particularly in an non-recourse state like California that has notoriously volatile house prices.
FHA loans as a tool to maximize return on investment
There is a strong secondary incentive to put the minimum down when buying real estate. When you calculate return on investment, the denominator is your investment. The smaller this number is, the higher the return. A 3.5% down payment provides six times the return of a 20% down payment. It’s not the great deal zero-down speculators had going during the bubble, but it’s not bad.
FHA loans are best if you might have to move
Shevy and I always tell people they should rent rather than buy if they think they might need to move in three to five years. Our reasoning is simple, since commissions and closing costs are about 8% of the sales price, it takes at least two years if not longer for houses to appreciate enough to get back the down payment. If a buyer needs to move during that time, their down payment is at risk. This is true irrespective of the financing used, but why should a buyer risk their own money when the FHA will assume more than half this risk for them? Given the uncertainties about future home prices, and the potential to need to move, a buyer is well served by passing off as much risk as possible to the FHA and the US taxpayer.
Personally, I probably won’t follow the advice given above. I didn’t create the awful incentives in the system, I just note them and let others decide how they should behave. There are many ways to rationalize passing speculative losses on to the FHA, and it’s not nearly as difficult to rationalize as stealing a house.
[listing mls=”OC14204550″]
This article says FHA originations are down but how much are loan originations down in general? The better question is whether FHA loans continue to represent 20 percent or so of the marketplace and — despite all the cries above — that’s the case.
Originations are down overall, and much of the decline is in refinancing. As you point out, a declining share of FHA loans should be hailed as a success for getting the government out of housing finance rather than some ominous sign of problems at the FHA.
Mortgage purchase applications are down ~11% YoY.
Refinances were down 73% YoY as of May.
http://www.calculatedriskblog.com/2014/08/mba-mortgage-applications-increase-in_27.html
Reviewing some data this morning reveals inventory increased 10% in OC in August, while sales dropped 6%.
The percentage of listings with a price cut has spiked to 41%, the highest level since 2010.
I’ve noticed a lot more listings with price drops. This is a typical fall pattern as sellers who remain listed in the fall and winter tend to be the most motivated.
Price cuts in the fall is typical, as some sellers start to get antsy.
The chart Zillow is displaying with price drops this week isn’t typical – it is shocking.
On the third chart down, toggle “listings with price cut”:
http://www.zillow.com/orange-county-ca/home-values/
The trajectory is flattening slightly, but still appears to be headed North. Will we see 50%?
We have officially exceeded the motivation/desperation of fall/winter 2013, and we may see similar stats to 2011.
In case you forgot bankers were lying about their solvency over the last five years….
Bank of America to pay $7.65 million for $4B capital error
Bank of America (BAC) is settling with the Securities and Exchange Committee to pay a $7.65 million penalty for a $4 billion capital error it disclosed earlier this year.
The Securities and Exchange Commission said Monday that it had charged the bank with breaking civil securities laws related to internal controls and record keeping.
The bank disclosed in April that it had miscalculated some capital levels since 2009. The error required the bank to resubmit its stress-test plans to the Federal Reserve, which oversees how much large banks can return to shareholders in dividends and share repurchases. Ultimately, the bank was able to keep its proposed 5-cent quarterly dividend but scrapped its plans for a share buyback.
The error was seen as a temporary setback for Bank of America CEO Brian Moynihan. In calculating its capital ratios before this year, the bank acknowledged that it went too far in stripping out “realized” losses on notes it assumed with its 2009 purchase of Merrill Lynch. The SEC said Monday that the misstatements grew each year as more notes matured, eventually reaching billions of dollars.
Fed’s Lockhart says weak demand puts rate hike timetable in doubt
(Reuters) – Atlanta Federal Reserve bank president Dennis Lockhart said the U.S. economy is still hampered by weak demand at home and internationally, potentially pushing the need to raise interest rates later into next year.
The forces that could weigh on the U.S. recovery include the recent run-up in the value of the dollar and the potential that could choke exports, Lockhart said, becoming the latest in a series of Fed officials this week to cite concern about currency appreciation.
Even though economic growth appears to be holding up at around 3 percent on an annual basis, Lockhart said consumer spending remains weak, wage growth is slow, and continued troubles in Europe have added to concerns about the global economy.
Taken together, that could weigh on the Fed’s progress in raising inflation toward its two percent target and require more patience from the central bank in deciding when to begin its first rate tightening cycle in a decade.
Given recent data, “it is hard for me to conclude that we have made progress on that objective,” Lockhart said. “In its fundamentals, inflation is reflecting what are still, in my view, lukewarm demand conditions… At this point I’m concerned more about a persistent undershoot,” than inflation which gets out of hand, as some at the Fed have warned.
He also stated what has become a sort of guiding principle at the Fed under chair Janet Yellen – that it would be worse to raise interest rates prematurely, and potentially damage the recovery, than to wait too long and risk faster-than-desired inflation.
[Many have speculated that the federal reserve will wait too long to raise rates and allow inflation to ease the burden on debtors. The above is confirmation of that.]
“It would be worse to reverse course because of having made a premature decision than to be patient and run the risk that you are a little late,” said Lockhart. “When we begin to change policy we want to have confidence in an outlook.”
As a result, even as many analysts have pushed forward their expectations of a Fed rate hike to earlier in 2015, Lockhart said he expected “conditions for liftoff to ripen by the middle of 2015 or later.”
[My guess is later rather than sooner.]
Six years after AIG bailout, trial asks: was it legal?
(Reuters) – One of the more unusual trials to come out of the 2008 financial crisis is set to begin on Monday, when a federal judge will consider whether the U.S. government’s rescue of American International Group Inc (AIG.N) was, in fact, legal.
In a case that explores the limits on U.S. government power in responding to major financial crises, the trial is expected to revisit in detail the New York Federal Reserve’s September 2008 decision to extend a bailout package to AIG as the insurance giant was minutes from bankruptcy.
The AIG bailout, on the heels of the Lehman Brothers collapse in 2008, preceded the “too big to fail” auto and bank bailouts the federal government undertook during a U.S. financial crisis underpinned by faulty mortgage lending.
The major players in that drama will be back on the Washington stage during the six-week trial: Former Federal Reserve Chairman Ben Bernanke, and former Treasury Secretaries Timothy Geithner and Henry “Hank” Paulson.
A lawyer for the insurance giant’s former chief executive, Maurice “Hank” Greenberg, was expected to argue that the government unlawfully sought to punish AIG shareholders with excessively harsh terms.
Greenberg’s lawyers have said in court papers the bailout “offer” from the New York Fed to provide AIG an $85 billion loan in exchange for high interest rates and a nearly 80 percent stake in the company amounted to unconstitutional theft from AIG shareholders.
[When a company stands on the abyss and would collapse without the bailout, how can any terms be considered usury? AIG wasn’t in a position to bargain, and if they had gone under, the shareholders would have obtained nothing.]
who cares if its legal or not. they did it. we pay for it. the American public was duped into it.
Anyone get a chance to listen to the leaked Goldman tapes? Yeah, they’re pretty much the government. Would be a non issue if AIG had failed. Goldman would have failed.
Good riddance to bad rubbish.
August Sees Drop in Pending Home Sales
realtors unable to effectively spin data
As existing home sales dipped in August, so too did contract signings, according to an industry tracker.
The National Association of Realtors (NAR) reported a 1.0 percent decline in its Pending Home Sales Index for August. The drop brings the index down to 104.7, its second highest reading so far this year. Even with the decrease, the index remained above 100 (considered an average level of activity) for the fourth straight month.
The drop in the pending sales measure came in the same month that the association reported a dip in existing home sales. According to NAR, sales of existing homes in August were at a seasonally adjusted annual rate of 5.05 million, down 1.8 percent from July.
NAR Chief Economist Lawrence Yun said the decline in both closed and pending sales reflects declining distressed sales and investor activity.
“Fewer distressed homes at bargain prices and the acknowledgement that we’re entering a rising interest rate environment likely caused hesitation among investors last month,” Yun said. “With investors pulling back, the market is shifting more towards traditional and first-time buyers who rely on mortgages to purchase a home.”
The shift is problematic for the market, considering the currently weak level of first-time homebuyer activity. According to NAR, first-time buyers have represented less than one-third of all buyers each month for the past two years.
However, Yun remains hopeful.
[He’s paid to remain hopeful. He’s a shill.]
“The employment outlook for young adults is brightening and their incomes finally appear to be rising,” he said. “Jobs and income gains will help repay student debt and better position first-time buyers, setting the stage for improved sales growth in upcoming years.”
I just got this spam from a local lender. Tell me if you think lending standards are tight.
STATED INCOME JUMBO PRODUCT
70% ltv 700 Fico 43%dti 2 mm
•5/1, 7/1 ARM and 15 Year Fixed
•Primary, SFR and PUD only
•70% LTV Loan Amount up to $1MM
•60% LTV Loan Amount up to $2MM
•Cash-Out up to 70% LTV
•Max. Cash Back to Borrower: $400,000
•Realtors allowed
•Gift Funds are Not Allowed
•Reserves: Refer to guideline
•No Pre-payment Penalties
•1099 Borrower & Realtors Allowed
JUMBO STATED INCOME PROGRAM
FOR SELF-EMPLOYED BORROWERS
WE DO NOT REQUIRE TAX RETURNS
Income & Employment must be disclosed
on 1003 and Income must be supported
by liquid assets reflecting a min. balance
of $100,000 or more for reserves
PROGRAM HIGHTLIGHTS
for more information
5/1, 7/1 ARM and 15 Year Fixed
Primary, SFR and PUD only
70% LTV Loan Amount up to $1MM
60% LTV Loan Amount up to $2MM
Cash-Out up to 70% LTV
Max. Cash Back to Borrower: $400,000
Bankruptcy – Not Permitted
Foreclosure, Short Sale – Not Permitted
Gift Funds are Not Allowed
Reserve Requirements;
Loan amount $650K to $1MM: $250,000
Loan amount >$1MM to $1.5MM: $500,000
Loan amount >$1.5MM: $1,000,000
Yes and no. The credit score seems fairly loose at 700. The DTI looks about right for high-income borrowers at 43%. The LTV at 30% for 1M and 40% for 2M seem pretty tight and the reserve requirements are very tight. Coming up with 429k to borrow 1M and 1.33M to borrow 2M seems like a lot.
No tax returns is obviously not tight, but reserve requirements are substantial. Between the down payment and the reserve on a 1M-1.5M loan, the borrower would need to put a minimum 429k down and keep 500k in reserves. So, for a 1.429M house, you are looking at (1,429-929)/1,429 = 35% pseudo-LTV.
The true tightness-test is how many borrowers are denied under these conditions or just don’t bother to apply.
The current Dow/gold ratio is at 14 and trending higher. You missed the bottom bucko.
LMAO. The longer term trend will resume toward 1 or 2. Currently everyone is fooled by massive intervention. Gravity has been temporarily suspended. DOW bonds RE up up and away.
I’ll probably go buy more physical gold tomorrow in your honor. Sentiment is so negative. The central banks are rejoicing. Goldman is rejoicing. I hope it drops to 1150 overnight.
Fighting the Fed is always a losing strategy.
Gold should remain free and never money. It is an asset class that is MOVABLE unlike that of real estate –Martin Armstrong
When I read that chart, based on the green band showing deviations from the norm, I see a good time to sell gold and buy stocks.
decent point.
However, the leverage is systemic and thus the fallout naturally will be greater.
That chart is from March 2013 which still would have been a decent time to sell. The following month, April 2013, is when the bloodbath really began, which is maybe why they haven’t updated it since then.
If you take the 1980 outlier out, where we experienced unusually high inflation for a number of unrelated reasons, and the gold standard and fiat standard eras are remarkably similar. Extrapolating trends based on one-off anomalous periods is likely to lead to bad assumptions.
the chart illustrates successively larger boom bust cycles as we become increasingly fiat. The leverage is never given the chance to be purged and thus each cycle become increasingly systemic.
’08 was systemic and we’ve been living on ZIRP / QE since then. Is that an anomaly as well?
In general I believe your premise of a larger boom bust cycle due to the federal reserve. A series of aborted busts builds up the garbage until a big purging bust is unavoidable.
The economy lived on near-zero interest rates for much of the 1950s as inflation eroded the currency to pay for the debts from WWII. So although the 2008 event was more extreme, the federal reserve policy isn’t completely unprecedented.
The bid difference in my mind is the reason we need to purge the debt. I can understand using inflation to devalue currency to pay war debt because we needed to fight and win the war, no matter the cost. The debts of the 00s weren’t so noble, and it’s naturally upsetting to prudent people to pay the bills through inflation.
No. ’08 looks right about where it should be; bracketing the trendline of ever increasing DOW/Gold ratios. If you connect the 1938 low to the 2008 low, the lower bracket seems to be about parallel to the trend line. The current ratio is 17000/1200 = 14:1. A data point that is oddly missing… trend appears to be reverting to the mean despite tapering QE.
I think 1980 should be excluded because the drop isn’t just from “purging mal-investments” but is from the meteoric rise of the denomenator as the US left the gold standard (from $38 to over $1000). Once the panic over high interest and inflation ebbed, gold price quickly retreated. Which speaks volumes about investors thoughts on gold value during normal economic times. Similarly, gold prices started to fall in 2011 as economic systems stabilized.
There was no QE in 1980, and certainly no ZIRP, so why did gold prices fall now AND then? Both systemic crises were averted by raising or lowering rates. One was crisis was out of control inflation, the other was out of control deflation. The loss of control is the common factor. Once the control was reestablished and normalcy returned, gold shined less brightly. You can talk all you want about QE, malinvestment, ZIRP, but none of this matters. Economic stability matters. That’s all.
Fed = so smooth
Doesn’t this chart just show that we do in fact have a fiat system? In other words that stock prices don’t depend on gold values? And why would they? Most of the businesses aren’t in the business of gold production or sales. Why would their stock price be limited by the amount of shiny yellow metal we can dig out of the ground every year?
a Gold/DOW ratio near 1:1 indicates boom time malinvestment has been purged. It shows the market moving from one end to the other of the leverage spectrum.
If billions of chimpanzees all worship the fiat gods, gold remains the barometer regardless. Fiat money is inherently an inaccurate gauge.
“If billions of chimpanzees all worship the fiat gods, gold remains the barometer regardless. Fiat money is inherently an inaccurate gauge.”
And if billions of chimpanzees all worship the gold gods, gold is also an inherently inaccurate gauge [of value].
Again, what does the price of gold have to do with the productive capacity of US industry? What is the inherent connection between gold price and stock price that says 1:1 is back to normal? Why should the DOW index equal the price for one ounce of gold, anyway? Why not 2 ounces, 10 or 100? Why can’t more value be packed into the DOW at higher densities than permitted by the FCC (face-centered cubic) structure of AU? This is illogical and therefore suspect.
Technological advances often result in speculative booms. Once these booms dissipate and the technology is fully implemented and integrated, the value of the technology is realized. This realization of productivity gains results in a net gain relative to prior value. Maybe 1:1 was correct before computing, automation, internet, etc. And maybe now 10:1 is correct.
Of course we wouldn’t have any of these productivity gains if we were still on the gold standard because we would all be out prospecting. There would be no money to fund invention until the money supply expanded by finding more gold. The gold standard seems like an artificial ceiling on growth.
Another way to look at it is: boom mal-investments are saying the relative value of gold has fallen compared to stocks. Which of course makes perfect sense. When stocks are jumping up, no one wants to buy gold. Gold doesn’t pay you anything to hold it. Stocks pay dividends and grow as the business grows. One gold ounce will always be exactly one gold ounce. It never grows and splits into two, three of seven (Apple) ounces.
Everybody need to make a buck and any lesson from the last meltdown is out the window as soon as the buck flow is slowing down. The cultural of Wall Street is very toxic. Everyone hated their work but they suck it up, put in 10-15 years of breakneck pace and retire a millionaire usually couple times over. At least that is the modus operandi any way which usually call for excessive risk taking to make the quick buck knowing that the FED got your back. I don’t think anybody really learns anything. We blows up. We recover. We blows up again. Like clockwork.
The next bubble to burst could be bond especially when I see Spanish 10y yield below the 10y treasury due to the bankers’ assumption that the ECB got their back with the future EURO bond. We have so much debt in the system, is there even a plan to pay anything back? I guess that question will be partially answered in the next crisis. Knowing how government operate. The answer would be a no. That could sparkle massive deflation with all the debt based wealth destruction. Yeah this does sound doom and gloom but we have been checked out of reality for so long. It hurts so much to check back it.
The FED system is so awkward. As some would say. Just let the Federal government print money outright to pay the debt might have been better. But than how might the banker get rich if there is no debt?
Usually, when a country gets in trouble with too much debt, the inflate the currency so the value of the money repaid is less than the money lent out. The best way to generate inflation is to control the currency, which the federal reserve does, so they can paper over any excesses in the banking system by printing money and creating inflation.
Some view this as a massive Ponzi scheme because the debts will never be paid down to zero. We will continually print and borrow to cover old debts in perpetuity. When the printing gets out of control, we get inflation. When the debt creation gets out of control, we get deflation. Right now, the deflation from collapsing debt and the inflation from printing money offset one another, but as deflation pressures subside, continued printing money will be inflationary.
IR says: “It’s not the great deal zero-down speculators had going during the bubble, but it’s not bad.
Don’t look now but Western FCU is offering 80/20 loans again and HELOC’s up to 100%.
https://www.western.org/down-payment-second-mortgage
https://www.western.org/flex-rate-heloc
[…] Last September I noted that High loan costs cause FHA originations to plunge; in fact, FHA financing is so expensive, it’s like taking out a 12.4% second mortgage! Something […]