FHA has always been the lender of last resort. It was started in 1934 during the depths of the Great Depression to provide mortgage lending at a time when private money wouldn’t do it. Of course, by then the housing market had bottomed, so the FHA loans from the Great Depression didn’t cause huge losses, and since there was almost no other mortgage lending during that period, it was a welcome jump start to a beleaguered housing market. 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 is sure to need a bailout.
By: Diana Olick
As lenders continue to try to modify delinquent mortgages or offer foreclosure alternatives, like short sales or deeds-in-lieu of foreclosure, the number of loans entering the foreclosure process are falling.
So-called “foreclosure starts” were down 2.6 percent in April from the previous month, according to a new report from Lender Processing Services.
As I always do, I will remind everyone that any declines in foreclosure starts simple means the market clearing time gets extended. It’s not as if lenders are out of delinquent mortgage squatters to foreclose on.
But it’s not all good news.
FHA loans, those insured by the federal government, saw a huge spike in foreclosure starts, up 73 percent during the month, according to the LPS report. Loans originated in 2008 and 2009 are primarily to blame, although all FHA vintages did see some, albeit far smaller, increases.
“In 2008, when the loan origination market virtually dried up, the FHA stepped in to fill the void,” explained Herb Blecher, senior vice president for LPS Applied Analytics. “FHA originations tripled that year, and increased to five times historical averages in 2009. High volumes like that, even with low default rates, can produce larger numbers of foreclosure starts.”
Unfortunately, FHA is not enjoying low default rates either. The March 2012 seriously delinquent rate was 9.4%. There are 707,863 seriously delinquent FHA loans. Last year, there were only 580,480 delinquent loans. FHA borrowers are still going delinquent faster than the government can foreclose on them. That’s the legacy of the housing bubble we taxpayers must pay.
Still the numbers mean a big hit to the FHA, which is already operating at well below its congressionally mandated two percent capital reserve ratio. “The 2008 vintage alone represents some $14 billion of unpaid balances in foreclosure, and the overall FHA foreclosure inventory continues to rise,” adds Blecher.
FHA took on a huge volume of loans in 2008 and 2009, “with relatively little oversight of underwriting and lending practices,” according to Guy Cecala of Inside Mortgage Finance. That has since changed of course, and FHA is aggressively going after lenders for certain claims and is pursuing large settlements. In the recent mortgage servicing settlement with the nation’s top five lenders, FHA got over $1 billion from the big banks.
“There is no question that claims—or losses—on FHA’s 2008 and 2009 business will be high,” says Cecala. “But if FHA is successful in getting large banks and FHA lenders to effectively cover those losses via large cash settlements, then the damage may be contained.”
The damage may be contained? Isn’t that what Ben Bernanke said about subprime back in 2007? Does that nonsense sound any more credible today than it did in 2007?
Let’s be realistic. An FHA bailout is coming. Every effort will be made to delay any announcements until after the election. The accountants will continue to use smoke and mirrors to make the fund look solvent. If the Republicans were smart, they would raise the issue as a sign of Obama’s incompetence. Of course, Obama had nothing to do with the FHA problems, but raising the specter of another government bailout under Obama’s watch plays better politically for the Republicans than it does the Democrats.
Gambling on the FHA
Since the 1970s, the California housing market has been a lottery where rich and poor alike can reap tremendous rewards on very small investments. Ever since the housing market began to unravel and FHA took over for subprime, many people bought with FHA loans because their only real risk was a tiny down payment and their credit score. If house prices went down, they could walk away, and if house prices went up, they fully expected to get a personal ATM machine. With little risk and a huge potential for reward, it should be expected that many took a gamble on housing, particularly in late 2009 and early 2010 when it appeared to the casual observer as if the market had bottomed.
Today’s featured REO was a late 2009 vintage FHA loan. The borrower made payment for a year or so, then she stopped and let you pick up the bill for her gambling losses.
So how do you feel about that?
San Clemente Overview
Median home price is $603,000. Based on a rental parity value of $558,000, this market is fairly valued.
Monthly payment affordability has been worsening over the last 3 month(s). Momentum suggests worsening affordability.
Resale prices on a $/SF basis increased from $278/SF to $280/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates increased $50 last month from $2,266 to $2,316.
Rents have been rising for 12 month(s). Price momentum suggests rising rents over the next three months.
Market rating = 3
$419,900 …….. Asking Price
$493,000 ………. Purchase Price
12/7/2009 ………. Purchase Date
($73,100) ………. Gross Gain (Loss)
($39,440) ………… Commissions and Costs at 8%
($112,540) ………. Net Gain (Loss)
-14.8% ………. Gross Percent Change
-22.8% ………. Net Percent Change
-6.4% ………… Annual Appreciation
Cost of Home Ownership
$419,900 …….. Asking Price
$14,697 ………… 3.5% Down FHA Financing
3.74% …………. Mortgage Interest Rate
30 ……………… Number of Years
$405,204 …….. Mortgage
$107,041 ………. Income Requirement
$1,874 ………… Monthly Mortgage Payment
$364 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$105 ………… Homeowners Insurance at 0.3%
$422 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,765 ………. Monthly Cash Outlays
($285) ………. Tax Savings
($611) ………. Equity Hidden in Payment
$18 ………….. Lost Income to Down Payment
$125 ………….. Maintenance and Replacement Reserves
$2,012 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$5,699 ………… Furnishing and Move In at 1% + $1,500
$5,699 ………… Closing Costs at 1% + $1,500
$4,052 ………… Interest Points
$14,697 ………… Down Payment
$30,147 ………. Total Cash Costs
$30,800 ………. Emergency Cash Reserves
$60,947 ………. Total Savings Needed
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