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.
New FHA Foreclosures Spike
Published: Thursday, 31 May 2012 | 4:15 PM ET
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.
$1 billion is a drop in the ocean. The FHA will lose far, far more than that despite the sky-high insurance rates current borrowers are paying.
“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
Proprietary OC Housing News home purchase analysis 
3439 PASEO FLAMENCO San Clemente, CA 92672
$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
——————————————————————————————————————————————-
We're sorry, but we couldn't find MLS # S699947 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$400,000 437 PLAZA ESTIVAL |
0.1 miles 3 bd / 2.5 ba 1,555 Sq. Ft. |
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$3,295,000 35401 BEACH Rd |
0.41 miles 3 bd / 1.5 ba 1,300 Sq. Ft. |
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$439,000 34561 CALLE NARANJA |
0.42 miles 3 bd / 1.5 ba 1,400 Sq. Ft. |
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$2,800,000 35535 BEACH Rd |
0.5 miles 2 bd / 1.75 ba 1,700 Sq. Ft. |
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$729,000 27012 DEL GADO Rd |
0.54 miles 3 bd / 2 ba 1,900 Sq. Ft. |
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$499,000 34473 CALLE CARMELITA |
0.58 miles 3 bd / 1.5 ba 1,336 Sq. Ft. |
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$1,300,000 34902 CAMINO CAPISTRANO |
0.6 miles 3 bd / 2.25 ba 1,909 Sq. Ft. |
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$525,000 617 AVENIDA VAQUERO |
0.69 miles 3 bd / 2 ba 1,602 Sq. Ft. |
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$410,000 856 CALLE PLUMA |
0.71 miles 2 bd / 1.5 ba 1,315 Sq. Ft. |
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$1,299,888 4001 VIA MANZANA |
0.81 miles 3 bd / 2.75 ba - Sq. Ft. |
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37 Responses to “FHA foreclosures increase 73%, mostly from 2008 and 2009 bad loans”
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This is MAJOR news. FHA is one of the reasons OC home prices are still over priced. The other two being low mortgages and high conforming limits. What is the end game?
”What is the end game” ??
“The Western World is about to enter its second recession in an ongoing depression”
“What is coming: Defaults”
“It is the big RESET”
http://www.scribd.com/fullscreen/95493792?access_key=key-2bukmjiiyjtzns9qcorz
That slideshow paints an alarming picture, but I still don’t understand how an issuer of currency can ever default. Why would the US government or any government which issues currency default rather than print more money? The PIGS may default because they gave up their own currencies to be part of the Euro. That’s apples and oranges. Any country that still has the printing press will use it. In fact, the Greek solution is to pull out of the Euro and crank up its own printing press again.
‘debasement’ is a stealth form of default, no?
Nonetheless.. ‘everything’ revolves around the petro-dollar
-If mass inflation occurs, the money dies
-If mass deflation occurs, the economy dies
P-$ hegemony is at-stake. If the money dies, it’s the end. The politicians will cede their power, pensions and other self-interests.
If the economy dies, politicians will still cede their power, but pensions and other self-interests could partially remain in-tact. They know this and will never let the money die. In fact, the US goes to war to protect it.
“‘debasement’ is a stealth form of default, no?”
Yes. In that regard, I see no way our modern monetary system goes forward without widespread currency debasement from the largest governments. I don’t know if these means the economy dies, but it will change the nature of who wins and loses.
What are you debasing against if everyone is debasing?
Pixies – “Debaser”
Sorry, could not resist…
“What are you debasing against if everyone is debasing?”
Gold.
If this happens I’m not worried about my housing pricing, I’m worried about food and safety
Exactly.
Guns, ammo, food, water, shelter and medicine.
Plus valuable stuff to barter with….like cigarettes, chewing gum, and feminine hygiene products.
Great presentation. Scary.
Hard to discount the domino effect proposed, but apocalyptic hyperinflation seems to be spurred by more than just massive over borrowing followed by malicious printing of money. Historic examples of rapid currency devaluation frequently were coupled with another important ingredient: governments that are either unwilling (Weimar Republic, Germany) or completely incapable (Greece, Spain, Mexico) of collecting income taxes from its constituents to fund exploding debt obligations.
I could be wrong, but it seems to me that the US and the UK are pretty good at this part of the equation (i.e. tax levying AND collecting), despite their death-defying borrowing acts. Meanwhile, Greece, Spain, Italy and Mexico governments have been historically disorganized and horrible at tax collection. I mean, this is why Mexico relies so heavily on crude oil, minerals and tourism to make it. They simply are incompetent and corrupt when it comes to collecting corporate and personal income taxes.
Radar Logic is going against the chorus of bottom callers and wisely acknowledging the supply problem overhanging the market.
Radar Logic: Prices Will Fall Further, Strengths Due to Temporary Forces
Even though Radar Logic reported a monthly increase in home prices for March, the analytics company expects prices to fall and gave credit to “temporary market forces” for recent strengths seen in the housing market.
“In light of the oversupply we continue to see in the market, we disagree with the widespread view that home prices have reached a bottom or will do so in the near future,” said Michael Feder, president and CEO of Radar Logic.
Feder added that a negative response to economic news, either in the U.S. or elsewhere, could also undermine housing demand and seriously hurt home prices.
According to Radar Logic, the RPX Composite price, which tracks home prices in 25 major metropolitan areas, showed a 1.8 percent increase on a monthly basis, but decreased by 0.87 percent year-over-year in March.
With distressed homes remaining a significant portion of home sales transactions, Radar Logic said the significant discounts for distressed properties in relation to non-distressed means a further fall in prices.
According to RealtyTrac, homes in foreclosure or bank-owned accounted for 26 percent of all residential sales during the first quarter of 2012. In addition, the average sales price of homes in foreclosure or bank-owned in the same quarter was $161,214, which is a 27 percent discount compared to the average sales price of homes not in foreclosure or bank-owned.
Quinn W. Eddins, director of research and author of the report, wrote, “Large inventories of REO and homes in the foreclosure process still have to make their way into the ‘visible’ inventory of homes listed for sale, and as they do they will weigh on home prices.”
As for the temporary forces giving the market an added boost, the report named institutional investors as one of the driving factors. As rental prices increase, large investors are buying up discounted properties to convert them into rental units. This trend is driving up prices for distressed properties in certain metros where investor demand is high. Once prices for discounted properties rise to the point that investors won’t yield the return they are seeking, demand will decline again.
Another market influence Radar Logic highlighted is the mild winter weather that was seen in many parts of the U.S. This led to an earlier start for home shopping. As a result, Radar Logic said the price for March’s strength may be paid by a weaker buying season later.
Radar Logic expects national home prices to decline over the next 18 months, but said when it comes down to it, timing of the bottom is academic.
However, the analytics company said, “The important point is that national home prices are not going to increase in a sustained and meaningful manner anytime soon.”
good article.
radarlogic points out some useful facts:
- REOs sell at a significant (27%) discount compared to non-distressed property
- REOs comprise a large percentage (26%) of all home sales.
- REOs therefore lower the price index (compared to a price index that excludes distressed sales).
- there is no shortage of REOs
the large number of REOs should continue to put downward pressure on home prices.
when REOs return to more normal levels the price index should see a boost.
One could argue that the Federal government–the FHA especially–is only a controlled adjunct of the banks. As feared by some at the start of the “crisis” (like Rick Santelli in his famous rant), the government is now directly prepared to give homedebtors Federal money…which money then goes directly not to those homeowners of course, but to the banks to protect them from loss from their utterly imprudent loans, at Federal taxpayer expense. This free money giveaway to “help homeowners” is the cover story for the looting of the Federal Treasury by the banks, now utterly directly; and then to further give money to the banks, rewriting the mortgage with manipulated low interest loans. http://www.lvrj.com/business/underwater-homeowners-offered-life-raft-156640585.html The cover story that such homeowners must have “stress” is fascinating. When some selected special people with no net value in their homes get free money and others, still slogging through their underwater mortgage, don’t get free money…that’s also when the good citizens paying underwater mortgages throw it in and hike off. In the short run, there could be a sudden surge of lower value homes in Nevada in foreclosure or short sale as a result of those good debt payers becoming disgusted with the whole thing realizing their own financial survival is grossly enhanced by walking away. So the net effect could be that banks end up net still losing.
An important different economic indicator, that of households getting back to the business of spending in Nevada at least, the sales tax receipts reported by the state show a jump in sales taxes from furnishings; the sale of furnishings jumping like this is usually an extremely positive sign for the housing market over the next year or two. http://www.lvrj.com/business/state-taxable-sales-jump-in-march-155454095.html Then again the same report shows sizeable decrease in construction, and of course Nevada suffers from the effects of the construction job bubble still winding down, so that’s a very negative report. Ultimately, it is jobs that drive home pricing up or down, not federal giveaways to banks.
Great comment. Thanks.
Homebuilding activity in Las Vegas is very strong right now. There is so little available on the MLS that buyers are turning to new homes to meet the demand. I question how sustainable that is with so many shadow inventory homes in town, but construction employment should improve this year because of the lack of MLS supply.
FHA Disputes Report That Foreclosure Starts Rose in April
The Federal Housing Administration is disputing a report that foreclosure starts on loans it insures spiked by 74 percent from March to April.
Lender Processing Services Inc. (LPS) may have erred extrapolating numbers from its database of information on 40 million loans in reporting yesterday that new foreclosures on FHA-backed loans rose to 63,126 in April from 36,311 a month earlier, FHA spokesman Lemar Wooley said in an e-mail. The FHA said its own numbers showed an 11 percent drop to 18,975.
“The bottom line is that the numbers in the LPS report for April simply don’t accord with our data,” Wooley said.
The FHA is expecting an uptick in foreclosures because legal disputes between state and federal officials and mortgage servicers over faulty foreclosures were resolved with a $25 billion settlement in February, Wooley said. Foreclosures had been slowed while the parties were negotiating.
The report by Jacksonville, Florida-based LPS, which said overall foreclosure starts declined 2.6 percent in April to 181,584, attributed the FHA spike to the expanded role the government mortgage insurer has played since the collapse of private housing finance in 2008. Loan originations backed by the FHA, whose website bills it as the world’s largest mortgage insurer, tripled that year.
“LPS has every confidence in its data and believes that there is likely a simple explanation for the difference between our numbers and FHA’s reported foreclosure starts for April,” said Herb Blecher, senior vice president for LPS Applied Analytics. “We have reached out to the FHA directly on this, and will share our findings as soon as we have a definitive answer.”
The lying veneer continues to peel away….
REIT’s still tanking…
MSCI US REIT INDEX
RMZ:
May1: 907
May4: 894
May30: 870
June4: 824
As I read this index, does that mean the value of a huge, broad swath of US commercial and rental residential real estate dropped 9% in ONE MONTH? (using 907 as the base). This wouldn’t have happened if they had rental income…oh wait, they do, REITS are the most consistent of dividend payers. So for those who think real estate only goes up…not so much. For those who think the best real estate only goes up, look at the stock of CDR, a well managed supermarket anchored reit, then take the chart back thirty years; and keep in mind the chart isn’t inflation adjusted. Isn’t real estate investing great? http://www.google.com/finance?q=cdr# and click in the chart upper left for years of display on “all”. NOTE: Interest rates are at all time lows and lending freely available to REITS, imagine if interest rates ticked up a few points what would happen to these…which underlie much US institutional and bank and bonds and lending and even property tax values for local communities.
Don’t show those numbers to the PWBC (“Perennially Wrong Bottom Callers”) –Acronym by Barry Riholtz.
I’d laugh if it weren’t so true …
http://www.youtube.com/watch?feature=player_embedded&v=UjZSCi2MSc4
Thanks, I am going to embed that in tomorrow’s post.
5 months w/o payment and all is well. Because I was in the HAMP program already, I cannot be part of HAMP-2. Chase is allegedly looking at doing an in house mod so we shall see. I saw this trainwreck coming for the responsible in 2008. I called for help at close to an 800 FICO, and they basically told me to jam it in my arse. Looks like I refused to follow that advice and decided to play the rules by their game. 3 months w/o paying to get trial mod, 2 months w/o paying to force the mod, that was in 2009. 5 months so far in 2012 and they are working on it. No N.O.D. filed either, so, it looks like this may be a longer process than I thought it was going to be. Kikcing the can down the road only leads to the same predicament, if the mod doesn’t solve the issue, add another fire sale. Too bad sooo sad property values are dropping. People who bought last year must be having a grand time watching their hard earned down payment POOF.
Good luck Swiller. My friend is going through the same thing. Hasn’t made a payment since mid 2010. He says everything is performed in super slow motion. Lender will send out paperwork to fill out, fill it out promptly…don’t hear back for 6 months. Repeat same cycle several times. They want this ordeal to be over, but only paying utilities every month is a bonus. He doesn’t miss paying that 4K per month housing nut (quite the stimulus if millions of people are in the same boat).
These stories make me feel like the Greater Fool once again. I was the fool who bought in 2007 knowing the risks. I was the fool who bought a house I could afford with a fixed rate mortgage. Now I’m the fool who’s about to drain his savings to refi into a 3% 15Y loan…
You’re not be rewarded for you prudence much. I suppose you are getting to refi at 3% which will help. Those interest rates wouldn’t be available if not for the crash.
You’re telling me Perpesctive. I could have bought a huge single family home with no money down, instead, I stuffed myself and two kids in a two bedroom condo, and even THAT, was far too much money. Hindsight isn’t 20/20, it’s a kick in the teeth. When I figured out that I was screwed, I just played the game by their rules, which are inherently filled with unfair practices. /shrug dunno, but I hate the whole process and real estate industry now.
Could somebody tell me why Irvine properties are selling like hot cakes right now? My wife and I have been looking for a place for the last 3 months, and good ones are snapped like there’s no tomorrow, at or more than the values of the properties. Are stupid/irresponsible buyers back in play now with the aid of our incompetent government?
You’re seeing the result of a lack of supply because lenders are withholding inventory from the market and allowing delinquent mortgage holders to squat. The demand isn’t much higher today than last year, and sales are still 20% below historic norms. The lack of supply is making the demand look more robust than it is. I recognize that doesn’t help you any today, but eventually the supply will get to market. Be patient.
Our relator said the house next door had 2 different offers from single, Asian men within a week of going on the market. Both of which have now been retracted a few days later. She said that this has been happening a lot recently in the OC and is very odd. Not sure if it is pervasive or if there is just lack of supply.
Thanks, Irvine Renter and Renter 2012, for the info. We’ve been and will continue to be patient.
It’s frustrating to have witnessed these reckless behaviors on the part of buyers over the years and to see them happening again now. Their memories are short, because they don’t get punished for being irresponsible, buying way over their means. They get rewarded instead with months of free rents, principle reduction, and all other goodies. The lenders are also equally reckless now, support these behaviors with our government’s assistance through these laughable 3.5% down and low credit score FHA insured loan programs, again.
And we the responsible ones will be left holding their bags again (higher taxes, higher fee, higher insurance,….).
Atone wrote
“And we the responsible ones will be left holding their bags again (higher taxes, higher fee, higher insurance,….)”
That was the intent.
I was blind, but now I see.
WGAS…. Irvine props were selling like hotcakes in 2006 too.
The bottom line is RE speculators are running wild in OC. Never seen so many playing in the sandbox at any one time. The incentives favor risk-taking which foments much higher levels of volatilty. The price mechanism is completely broken. Best to stay away. Retail buyers are sitting ducks–WILL BE BURNED, as before.
eO,
If the “investors” are wise, they will take a FHA owner occupied loan with very little down. If the market goes down, squat or rent it out for a few years to recovery the down. If the market really goes down, some can be really made the house cash flow positive by deferring maintenance — rent income >> interest + HOA payments, which might be zero with a strategic default. When bank FC will be a gamble.
The government is doing everything to bailing out the banks (remove liability) regardless to the long-term cost to the taxpayers.
Atone, regarding the craziness of the housing market. You’ve got a few things driving it:
1. Record low interest rates. Check.
2. Government backed low down average credit loans. Check.
3. Lenders withholding supply allowing indefinite squatting. Check.
4. Annual spring/summer buying season. Check.
5. Rising rents (Irvine Company monopoly). Check.
6. Little organic supply, few have any equity to move up. Check.
7. Very large conforming loan limits kept in most of OC. Check.
I’m sure I left off a few. With the above conditions, anything decent priced around 500K and lower is gone quick. Most people just look at the monthly payment and with 3.X % rates, this cheap money goes a long ways.
The 750K and up market is definitely different. It’s much harder to get financing and the move up market is completely dead. This will be the sweet spot in the next few years.
This is very frustrating for responsible people who didn’t get involved in the bubble. Also take into account many people who walked away or were foreclosed on after the bubble burst are now back in the housing game competing with you. This is the land of the mulligan!
WTB,
Yes, it’s all working as planned. At least the first are government backed and the loan owner put down a whopping 3.5% down on most houses under $700k. If they overbid by $50k on a house, it’s only $1750 out of pocket with a FHA loan. But who cares, not the loan owner with no real skin in the game ($25,000 down. house appreciates = win, house depreciates = 2 years of squatting which sure beats paying rent for 2 years.
The responsible (i.e., fools) puts large down payments on a depreciating asset. They risk their down payment and squatting option. The bank is more likely to FC to recovery the loan balance with 80% LTV house than to FC to declare a loss on a 105% LTV house.
Perspective, did you put a sizable down payment?
Why refinance with a 15 year instead of a 30 year loan?
We live in a brave new world.
All true newbie. I think I need to add bullet point number 8 to my list:
8. The government has made it very clear that loan owners will be treated much differently than no good, lousy renters. You get to live in a house, apply for loan mods, principal reductions, squat for years, skim rent, etc. Renters can live in their car if they miss the next payment.
Americans as a whole are pretty stupid; however, they are pretty good at gaming the system and getting something for nothing.
[...] reported by Larry yesterday FHA loans foreclosure rates have increased. It’s an incredible 73% increase and most of the increase are from post-bubble lending. In [...]