The FHA has been the lender of last resort throughout the housing bubble crash. They insured loans which didn’t properly price in risk during a declining market. No private lender would have made such loans, particularly as the super-low interest rates engineered by the federal reserve. The FHA has tried to raise its cost of money to cover the risk by increasing the insurance fees which drives up the effective interest rate, but their onerous fees have fallen short of covering the upcoming losses.
In the FHA’s defense, the loans they underwrote were of high quality, and although they reached pretty low for FICO scores, the documentation and underwriting was sufficient to protect the taxpayer from unqualified borrowers. What the FHA couldn’t protect the taxpayer from is the losses associated with falling prices.
As a business model, subprime lending works in an environment of rising prices. Even when the default rates are high, if prices are rising, the losses on those defaults is minimal. However, when prices are falling, high default rates make for very large default losses, and the business model is untenable. FHA is facing a similar problem, but for different reasons.
FHA had good underwriting, but the tiny down payments and falling prices have trapped all of their borrowers underwater. Over time, people want to move. The FHA will need to approve many short sales from underwater borrowers in 2007-2011 vintage loans, particularly from the earlier vintages that are severely underwater. Of course, that assumes the owner bothers with the short sale process. With no equity, it’s easy for an FHA borrower to simply stop paying and move on. To them, the house was no different than a rental. Their down payment was not much larger than a security deposit, and they recover that with just a few months of squatting before they go.
The problem isn’t that FHA borrowers are subprime borrowers, although some are sprinkled into the mix. The real problem is that prices went down, and the only viable choices for FHA borrowers are short sale or strategic default. Either ones means the FHA insurance fund takes a hit, and if enough borrowers need or want to move, the FHA will face serious losses. I think a bailout is inevitable.
Closer to a bailout? FHA’s mortgage delinquencies soar
By Tami Luhby @CNNMoney July 9, 2012: 5:11 AM ET
NEW YORK (CNNMoney) — The mortgage market appears to finally be stabilizing — as long as you ignore loans backed by the Federal Housing Administration.
Increasingly, FHA-insured loans are falling into foreclosure or serious delinquency, moving in the opposite direction of loans guaranteed by Fannie Mae and Freddie Mac or those held by banks, which are all showing signs of improvement.
Does anyone really believe bank-held mortgages delinquency rates are down 39%? Based on the charts of shadow inventory, the number of 90-day delinquent loans hasn’t declined much at all over the last year. We know the banks have not been foreclosing in earnest, and they have billions in non-performing HELOCs and second mortgages on their books. I don’t see how they could have reduced their delinquency rates that much. Perhaps the include the loan modifications which temporarily cure the loans?
And taxpayers could ultimately be on the hook for FHA’s growing number of troubled mortgages. The agency’s finances are already on shaky ground, and additional losses from loans going sour could prompt the need for a federal bailout, experts said.
“We can’t escape this one,” said Joseph Gyourko, a real estate professor at the University of Pennsylvania’s Wharton School. “This is an arm of the U.S. government.”
The share of government-guaranteed loans, a majority of which are backed by FHA, that were 90 days or more delinquent soared nearly 27% during the year ending March 31. Foreclosures jumped nearly 17%, according to a report published recently by federal regulators.
This is a catastrophe for politicians who were hoping to avoid an FHA bailout. The Obama administration will ignore this problem until after the election if the Republicans let him.
At the same time, bank loans saw a dramatic improvement, with delinquencies shrinking by 39% and foreclosures declining by nearly 10%. Fannie and Freddie’s portfolio also improved as delinquencies dropped by nearly 15% and foreclosures slid by more than 6%, the quarterly report issued by the Office of the Comptroller of the Currency said.
I still don’t get the math. If delinquencies are down, and foreclosures are down, how did all these bad loans get cured? The people who squatted for the last three years didn’t suddenly come up with the money. It doesn’t add up unless the banks are counting bogus loan modifications.
FHA has also had a tougher time successfully modifying loans. More than 48% of government-guaranteed mortgages re-defaulted 12 months after modification, compared to 36.2% of loans overall, the report said.
FHA’s risky borrowers:
FHA doesn’t make loans, but it backstops lenders if borrowers stop paying. With this guarantee in place, banks are more likely to offer mortgages to borrowers with lower credit scores or incomes.
Housing experts have been warning for years that many FHA-insured loans are not sustainable, especially in these troubled times. That’s particularly concerning because FHA’s share of the market has swelled in recent years as lenders pulled back on providing mortgages that weren’t backed by the government.
Orange County is also a hotbed of FHA loans.
One of the main critiques of FHA loans is that they require very low downpayments — a minimum of 3.5%. In an environment where home prices are declining, borrowers can quickly slip underwater and owe more than their property is worth.
Actually, it’s worse than that. At 3.5% down, the borrower is effectively underwater the day they move in. Ordinarily, the buyer is the most aggressive bidder in the market, so they may have bid up the price too high. Plus, it takes a 6% commission and about 2% in closing costs to get out. In the real world, anyone who puts less than 10% down is effectively underwater from the start.
“These are very risky loans,” said Ed Pinto, resident fellow at the American Enterprise Institute, a conservative think tank. And loans made in the past three years are “moving into the beginning of the peak delinquency period and they are very big books of business.”
Unless the economy improves significantly over the next few years, FHA will experience even more delinquencies, said Guy Cecala, publisher of Inside Mortgage Finance, an industry publication.
Unless prices go up and the economy improves, the FHA will experience more delinquencies. A certain number of people lose their jobs, need to relocate, or otherwise must sell their houses each year. In a rising market, these sales get absorbed without much problem, the borrower pays off the loan, and nobody is harmed. However, in a weak economy, more people default due to their job situation, and the falling prices prevent them from getting out whole.
Little room for failure:
The dramatic jump in delinquencies comes despite the agency’s efforts to improve the quality of the loans it insures.
Over the past several years, soaring defaults have been eating away at FHA’s emergency reserves, which cover losses on the mortgages it insures. In fiscal 2009, the reserve fund dropped to 0.53% of FHA’s insurance guarantees, well below the 2% ratio mandated by Congress. By late last year, it had fallen to 0.24%.
FHA pledged to shore up its standards and its finances in 2009. The agency has since increased its insurance premiums, established minimum credit scores for borrowers, required larger downpayments from those with credit scores below 580 and banned sellers from assisting borrowers with the downpayment. It also created an office of risk management and cracked down on lenders with questionable underwriting processes.
Despite the emergency fund’s diminishing reserves, FHA maintains that its efforts are working. The loans insured starting in 2009 are much higher quality and should lower delinquency levels over time, an FHA official said.
The steps the FHA took are appropriate, and their loans should perform better over time. Increasing the insurance premiums will help cover the losses, and eliminating down payment assistance eliminated the largest source of delinquent borrowers from the pool. Unfotunately, it these measures will prove to be too little too late.
“We expect the new books will continue with their better performance, primarily because of the steps that were put in place,” he said. “And we are benefiting from having more high-credit borrowers.“
Was the FHA limit has been kept at $729,750 while the conforming limit for GSE loans was dropped to $625,000 was to get more high wage earners into the FHA program? If so, it was a smart move. The high wage earners paying more than 1% of their huge mortgages into the FHA insurance fund will really help — assuming prices don’t crash causing big losses among those borrowers.
Still, FHA watchers warn that the agency doesn’t have much of a cushion against these rising delinquencies and foreclosures. And if the losses grow too great, the agency could need a taxpayer-funded bailout.
The FHA says that its reserves should be restored by 2014 barring a second recession, but outside experts aren’t so sure.
“They are doing very badly … there’s no two ways about it,” said Andrew Caplin, a New York University economics professor who has studied the agency. “Over the next five years, there won’t be enough of an economic recovery to fix FHA’s finances. Not a chance.”
What form would an FHA bailout take?
Even if the FHA requires a bailout, it probably won’t result in the loss of taxpayer funds. The government will likely make the FHA a bridge loan at 0% interest against future premiums. This will make the FHA solvent while they earn their way back to health. Once prices start rising, the default losses will decline, and eventually, the fund will have more coming in than going out. If the government has to make the FHA a bailout loan, which seems likely, the premiums will have to remain high for a little longer to pay off the loan. In the end, the taxpayer will not end up losing money, but future FHA borrowers will be paying the losses on bubble era loans for quite some time.
From FHA to Ponzi
Many, perhaps most, first-time homebuyers use FHA loans because the down payment requirements are so low. Many people enter the housing market using an FHA loan, wait until house prices rise 20%, then they trade up or refinance to get into conventional financing. However, during the housing bubble, many Ponzis entered the housing market with an FHA loan, then took hundreds of thousands in free money and blew it. The former owner of today’s featured property used a low down payment loan to get into the market in 2000 and managed to borrow another $335,000 in free money. I’ll bet he reapplies for an FHA loan when he qualifies again.
- This property was purchased with a $402,871 first mortgage. The sales price is conjecture based on the transfer tax paid, but they likely actually paid $415,000 and used a 3% FHA down payment of about 12,000.
- On 3/5/2002 they refinanced with a $327,000 first mortgage and obtained a $100,000 HELOC.
- On 12/22/2003 they refinanced with a $455,000 first mortgage.
- On 8/11/2004 they obtained a $150,000 HELOC.
- On 3/29/2007 they refinanced with a $736,000 first mortgage.
Apparently, that free money got too expensive, and they couldn’t afford the payments. They defaulted and lost the house.
Mission Viejo Overview
Median home price is $420,000. Based on a rental parity value of $579,000, this market is under valued.
Monthly payment affordability has been improving over the last 2 month(s). Momentum suggests improving affordability.
Resale prices on a $/SF basis increased from $237/SF to $240/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates increased $37 last month from $2,327 to $2,365.
Rents have been rising for 12 month(s). Price momentum suggests rising rents over the next three months.
Market rating = 7
Proprietary OC Housing News home purchase analysis 
25 HOLLYHOCK Ln Mission Viejo, CA 92692
$536,750 …….. Asking Price
$403,000 ………. Purchase Price
9/28/2000 ………. Purchase Date
$133,750 ………. Gross Gain (Loss)
($32,240) ………… Commissions and Costs at 8%
============================================
$101,510 ………. Net Gain (Loss)
============================================
33.2% ………. Gross Percent Change
25.2% ………. Net Percent Change
2.4% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$536,750 …….. Asking Price
$107,350 ………… 20% Down Conventional
3.67% …………. Mortgage Interest Rate
30 ……………… Number of Years
$429,400 …….. Mortgage
$104,653 ………. Income Requirement
$1,969 ………… Monthly Mortgage Payment
$465 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$134 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$135 ………… Homeowners Association Fees
============================================
$2,704 ………. Monthly Cash Outlays
($311) ………. Tax Savings
($656) ………. Equity Hidden in Payment
$129 ………….. Lost Income to Down Payment
$87 ………….. Maintenance and Replacement Reserves
============================================
$1,953 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,868 ………… Furnishing and Move In at 1% + $1,500
$6,868 ………… Closing Costs at 1% + $1,500
$4,294 ………… Interest Points
$107,350 ………… Down Payment
============================================
$125,379 ………. Total Cash Costs
$29,900 ………. Emergency Cash Reserves
============================================
$155,279 ………. Total Savings Needed
——————————————————————————————————————————————-
We're sorry, but we couldn't find MLS # S704085 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$619,000 21241 MAZATLAN |
0.84 miles 3 bd / 3.5 ba 2,283 Sq. Ft. |
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$674,200 28551 MALABAR Rd |
0.94 miles 4 bd / 3 ba 2,600 Sq. Ft. |
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$575,000 21891 CONSUEGRA |
1.43 miles 3 bd / 2.5 ba 2,303 Sq. Ft. |
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$699,900 20 VIA ARRIBO |
1.44 miles 5 bd / 2.5 ba 2,872 Sq. Ft. |
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$750,000 28871 HEDGEROW |
1.45 miles 4 bd / 2.5 ba 2,723 Sq. Ft. |
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$579,000 3 OBISPO |
1.48 miles 4 bd / 3 ba 2,712 Sq. Ft. |
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$774,976 - |
1.9 miles 4 bd / 3 ba - Sq. Ft. |
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$599,000 2 SAN TOMAS |
1.92 miles 5 bd / 3 ba 2,382 Sq. Ft. |
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$529,000 19332 OAKIE DOAKIE |
1.94 miles 3 bd / 2.25 ba 2,071 Sq. Ft. |
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29 Responses to “FHA mortgage delinquencies skyrocket more than 25%”
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At what point do the loan limits for an FHA loan decrease? Or is it at permanent $729,000 for Orange County?
It certainly won’t go down until a viable jumbo loan market returns. That appears to be years away yet.
Once govt price controls are imposed, loan limits will decrease and there will be no need for a jumbo market.
The loan limits are reviewed every year in September, changed in October.
Take a look if possible at Northern California. The percentage of Jumbo FHA loans is very high relative to our market. Big down payments to knock the loan amount down to $625,500 is very common, but those without the green to do so are closing FHA.
Remember! Tuesday is Soylent Green Day.
So the FHA is using high wage earning borrowers to help recover it’s fund faster. I didn’t understand why they left that limit higher until I saw the connection between this higher limit and funding the FHA shortfall.
Yeap. If we refi today with a loan in the mid-$400s and a high LTV, the only option available is a 30Y FHA loan. That loan comes with an upfront MI of 1.75%! The annual MI is 1.25% and that lasts a minimum of 5 years regardless of LTV!
e.g. $450K loan:
$7,875 Upfront MI
$469 Monthly MI
So at a great 3.75% rate, the P&I would be $2,084 but the MI adds $469! This is how FHA may be rebuilding their reserves.
If we can refi just $417K, then there is no upfront MI from Fannie/Freddie and the annual MI is 30-80 bps depending on LTV and term. That’s a huge difference.
The conforming loan limit this year (and for the last few) is $417K. That’s the magic number for the best rates and terms. Then there’s the “jumbo conforming” which for Fannie/Freddie is $417K-$625K and $417K-$729K for FHA. However, rates at these loan amounts jump 50+ bps. Mortgage insurance rates jump. Terms disappear.
Most Irvine resales are jumbo conforming under $625,000. Many of the new home sales are FHA. It’s harder for an FHA buyer to get a resale, but the builders will take them all day long to close the deal.
I guess the banks are not out of people to foreclose on after all…
May Foreclosure Starts Nearly Triple Sales: LPS
In May, foreclosure starts outnumbered foreclosure sales by a near 3-1 ratio, according to a report from Lender Processing Services (LPS).
Even though foreclosure starts and sales saw similar monthly increases in May, 11.6 percent and 10 percent respectively, the actual number of foreclosure starts was significantly higher than foreclosure sales. Foreclosure starts numbered 202,707 while foreclosure sales totaled 73,439.
Also, foreclosure inventory maintained historically high levels at 4.14 percent.
LPS Applied Analytics SVP Herb Blecher said the situation is more nuanced when looking at the breakdown between states that apply judicial versus non-judicial foreclosure processes.
“There’s a stark contrast in foreclosure inventories between judicial and non-judicial states,” said Blecher. “In the former, 6.5 percent of all loans are in some stage of foreclosure – that’s more than 2.5 times the rate in non-judicial states where only 2.5 percent of loans are currently in the foreclosure pipeline.
Blecher added both figures are significantly higher than the pre-crisis average of 0.5 percent, but noted the average yearly decline in non-current loans for judicial states is less than one percent compared to 7.1 percent in non-judicial states.
Unlike non-judicial states, lenders must receive court approval before initiating a foreclosure. This leads to a longer timeline for when foreclosures actually exit the pipeline.
In non-judicial states, foreclosure sales were three times greater than in judicial states, with 6.46 percent of foreclosure inventory making its way out of the foreclosure pipeline in May compared to only 2.14 percent in judicial states. Judicial states also hold a much higher percentage of past due loans that are more than two years old. In judicial states, about 53 percent of loans in foreclosure have been delinquent for more than two year compared to just over 30 percent of loans in non-judicial states.
At 7.2 percent, delinquencies in May were up slightly by 1.1 percent, but down almost 12 percent a year ago.
LPS uses loan-level residential mortgage data and performance information on nearly 40 million loans for its monthly report.
States with highest percentage of past due loans
Florida
Mississippi
New Jersey
Nevada
Illinois
States with the lowest percentage of past due loans
Montana
Alaska
South Dakota
Wyoming
North Dakota
Off topic, but sort of related to lending and mortgage rates.
New York Fed Says It Knew of Barclays Libor ‘Problems’
By Caroline Salas Gage and Joshua Zumbrun – Jul 10, 2012 7:08 AM PT
The Federal Reserve Bank of New York was aware of potential issues involving Barclays Plc (BARC) and the London interbank offered rate after the financial crisis began in 2007, according to a statement from the district bank.
“In the context of our market monitoring following the onset of the financial crisis in late 2007, involving thousands of calls and e-mails with market participants over a period of many months, we received occasional anecdotal reports from Barclays of problems with Libor,” New York Fed spokeswoman Andrea Priest said in an e-mailed statement.
“In the spring of 2008, following the failure of Bear Stearns and shortly before the first media report on the subject, we made further inquiry of Barclays as to how Libor submissions were being conducted,” the statement said. “We subsequently shared our analysis and suggestions for reform of Libor with the relevant authorities in the U.K.”
Representative Randy Neugebauer, a Texas Republican who serves on the House Financial Services committee, sent a letter to New York Fed President William C. Dudley dated yesterday requesting transcripts of communications between the district bank and Barclays relating to setting interbank offered rates from August 2007 to November 2009. Neugebauer asked for the documents by July 13.
Barclays Chief Executive Officer Robert Diamond quit last week after the U.K.’s second-biggest lender was fined a record 290 million pounds ($450 million) for attempting to rig interest rates.
The Senate Banking Committee has begun to schedule briefings “with relevant parties to learn more about these allegations and related enforcement actions,” Senator Tim Johnson, a South Dakota Democrat who chairs the Senate Banking Committee, said in a statement.
Johnson also said that he is asking Treasury Secretary Timothy F. Geithner and Fed Chairman Ben S. Bernanke to “be prepared to answer Senators’ questions on this matter” at upcoming hearings.
To contact the reporters on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net
As that scandal grows, it smells worse and worse to me.
Yes, it’s growing. Need to add Barclays to “Real Heroes in Real Estate”.
With problems with the FHA market, income levels, lack of jobs, inflated student loans, cost of maintaining foreclosed homes, too much leverage, Europe deflating, Chinese slowing etc., so when are the banks going to let go of the +10M units in shadow inventory? Am I forced to move from OC where prices are about 3:1 my income plus cheap rates make buying ok? Just how long can they keep this up. I guess when you are borrowing from the FED at 0.25% it makes a lot easier.
It is getting frustrating and I don’t know how much longer I can keep the wifey from buying a house and wanting to settle down.
I think we are married to the same woman.
She married all three of us.
We’re all Japanese now. This could take years. There are worse things that could happen than buying a house near rental parity at a fixed cost of 3.5%…
In Tokyo, the realestate remained flat after the crash of 89. See here.
http://housingjapan.com/2011/11/10/a-history-of-tokyo-real-estate-prices/
If we are like Japan, we will not crash anymore. We will remain flat for 15 years.
That’s a great article. I suspect we won’t have quite as long to wait for rising prices as the Japanese did, but the period of flattening that began in 2009 may persist through 2016 or even 2019.
True, Japan remained flat for 15 years, but they did not put the band aid on and took a 80% markdown early. We took a 30-40% haircut, but as we are seeing today, it is still not inline with the incomes of the area.
I don’t know which way is better. We could have taken a 50-80% cut at time zero and let market forces dictate prices. Instead we have an artificial market where prices are propped up by government supported tax credits and artificially low interest rates. We could see another 10-15 years of no growth or 10-15 years of slightly negative growth especially considering incomes, student loans, job prospects and demographics (more old people selling assets to a poorer group of young people). I’m just saying….there are some choppy waters ahead.
The collapse has been constrained to provide ‘exits’ for the chosen survivors, hence, is still underway.
Real wages in Japan have been flat for 15yrs +. Current real wages in the US are falling along with the value of employee benefits + landscape shift from full-time to part-time/temp predominance. Accordingly, we will remain in a long, slow price bleed (charting a series of lower highs and lower lows) over the next decade+.
Based on ‘action’ in the options market, support for this type of scenario continues to rise.
What would be most interesting would be to find out what these people did with their HELOC cashouts!!!!! 300k-500k is a lot of money! Did they buy another property, move the money offshore, gamble it away, blow it on granite countertops, take grand vacations, buy new cars, etc?????? People must know some of these people.
“blow it on granite countertops, take grand vacations, buy new cars,”
That’s my guess. Most of it went to consumption, and some when toward debt service. Very little was actually saved or invested.
Larry, the reason for the 39% drop in bank-held delinquencies is simple. Rather than deal with this toxic garbage themselves, the banks are selling to private equity for 50 cents on the dollar. These PE funds are not banks and therefore don’t report to the OCC. These deals got a lot of press in ’09, but the closings have really picked up this year, esp post foreclosure settlement.
Thanks, I didn’t know that. That makes sense. The trash has been moved to someone else who will have to deal with these people. Perhaps we will start to see stories about the mortgage write downs these toxic loan buyers must be doing.
The number jumped out at me because we know those toxic mortgages weren’t cured. The problem still exists, it’s just a matter of where we find it.
Uh…. since banks tend to lie and cheat to the market in order to conceal negative realities, it would take unbounded naivety to believe bank-held dq’s have dropped as much as 39%. 15-20% tops is much more plausible. just say’n
If Fannie/Freddie had a decline of 14%, then that can be used as a baseline. It would only take the sale of another 25% of portfolio DQ’s to reach 39%. Most of what banks service is owned by other investors, so it wouldn’t require the sale of very many loans to bring the bank held delinquency down this much.
6% commissions and 2% closing costs is so 2007. Most realtors will work for under 2% commissions and in the future probably a flat fee. With so many underwater owners… I expect to see ebay and craigslist home sales before people pay 6% commissions to outdated middle men again.
[...] Source: OC Housing News [...]
[...] jumped nearly 27% during the year ending March 31, and foreclosures increased nearly 17%…FHA has been the lender of last resort throughout the crisis and made loans that private lenders shu…..CoreLogic also reported on home with negative equity for the 1st quarter (pdf)…they showed that [...]