In a recent post, I noted that FHA mortgage delinquencies skyrocketed more than 25%. Since most FHA borrowers only put 3.5% down, when factoring in a 6% commission, 2% closing costs, and a declining market, nearly all FHA borrowers over the last five years are effectively underwater. When these borrowers sell or quit paying, the losses will be huge because the capital recovery will be far less than the original loan balance. With a 9.4% serious delinquency rate, the FHA is facing 713,104 future foreclosures. This rate has been rising steadily, and many more delinquencies are coming because many borrowers will want to move before prices regain peak values. Many borrowers may opt for a strategic short sale or strategic default, after all, they don’t have much skin in the game, so it’s easy for them to walk away.
The FHA insurance fund has far less in reserve than its federal mandate, and many observers are concerned a bailout of the FHA is inevitable.
To avoid a federal bailout, the fund must be replenished quickly with user fees. To this end, the FHA recently raised the fee it charges at origination and the fee for ongoing insurance. Even these measures may not be enough. To raise more money, the FHA must abandon its mandate to provide loans to low and moderate income borrowers and tap into the market for high wage earners. After the fund stabilizes, the conforming limit for FHA loans can be lowered again and the FHA can return to exclusively making loans for low to moderate income borrowers.
In 2008, the conforming limit for both GSE and FHA loans was raised from $417,000 to $729,750 as non-insured private financing evaporated. In late 2011, the conforming loan limit for high income areas like Orange County or the San Francisco Bay area was lowered on GSE loans from $729,750 to $625,000. What perplexed many at the time was that the conforming limit for FHA loans was not similarly reduced. Why did the government do this? They too recognized the need to get high wage earners into the fund.
Ever since the change, many of Shevy’s clients faced the cost of financing dilemma this change creates. If the borrower uses a $625,000 GSE-backed loan, even with less than 20% down and private mortgage insurance, the cost of ownership is significantly less (PMI is half of the FHA insurance fee). The cost of the incremental dollars when the borrower goes from $625,000 to $729,750 with less than 20% down is significant (nearly $500 per month) because the FHA insurance is much higher. The borrower pays the extra money into the FHA insurance fund. Anywhere high wage earners are using FHA loans — and many are — the FHA is getting a considerable revenue boost.
Why not do more? If we really wanted to get more high wage earners to pay FHA insurance, why not lower the GSE conforming limit further?
Think about what would happen if the GSE conforming limit were reduced back to $417,000 and the FHA limit were maintained at $729,750. Anyone putting less than 20% down on a house between $450,000 and $750,000 — which is a huge portion of the coastal markets in California and New England — would be pushed into FHA loans. If these markets really have bottomed — and that’s a big “if” — these new high wage earning borrowers would not cause large losses, and the increase in FHA insurance payments would be dramatic.
Further, if the conforming loan limit on GSE loans were reduced, it would also help reduce the size of their operations and make it easier to someday dismantle them. As long as the GSEs are insuring more than half the housing market, there is no way we can reform or eliminate them.
Lowering the GSE conforming loan limit will significantly increase FHA insurance fund revenues while simultaneously reducing the footprint of the GSEs. Don’t be surprised if you see this happen sometime soon. If politicians don’t do something like this, they will have to bail the FHA out, and none of them want to face that problem.
The FHA never insured Option ARMs
The GSEs bought a large amount of toxic mortgage paper in 2005 and 2006 which helped facilitate their implosion. Fortunately for the US taxpayer, the FHA never did anything quite this stupid.
- The former owner of today’s featured property purchased on 11/13/1993 using a $495,000 using a $396,000 first mortgage and a $99,000 down payment.
- On 6/16/2004 they refinanced with a $446,000 first mortgage.
- On 12/17/2004 they refinanced with a $576,000 first mortgage.
- On 9/16/2005 they obtained a $568,000 Option ARM with a 1% teaser rate and a $75,000 HELOC.
- Assuming they maxed out their HELOC, the total mortgage equity withdrawal was $247,000 including their down payment.
The defaulted in early 2009 and were foreclosed on in early 2011, so they only got to squat for two years. $247,000 in free money and two years squatting isn’t impressive by Orange County standards, but it was still a good take for them.
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We're sorry, but we couldn't find MLS # S706437 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
Proprietary OC Housing News home purchase analysis
518 West ALPINE Ave Santa Ana, CA 92707
$485,000 …….. Asking Price
$495,000 ………. Purchase Price
10/13/2003 ………. Purchase Date
($10,000) ………. Gross Gain (Loss)
($39,600) ………… Commissions and Costs at 8%
============================================
($49,600) ………. Net Gain (Loss)
============================================
-2.0% ………. Gross Percent Change
-10.0% ………. Net Percent Change
-0.2% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$485,000 …….. Asking Price
$16,975 ………… 3.5% Down FHA Financing
3.55% …………. Mortgage Interest Rate
30 ……………… Number of Years
$468,025 …….. Mortgage
$121,697 ………. Income Requirement
$2,115 ………… Monthly Mortgage Payment
$420 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$121 ………… Homeowners Insurance at 0.3%
$488 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$3,144 ………. Monthly Cash Outlays
($316) ………. Tax Savings
($730) ………. Equity Hidden in Payment
$19 ………….. Lost Income to Down Payment
$141 ………….. Maintenance and Replacement Reserves
============================================
$2,258 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,350 ………… Furnishing and Move In at 1% + $1,500
$6,350 ………… Closing Costs at 1% + $1,500
$4,680 ………… Interest Points
$16,975 ………… Down Payment
============================================
$34,355 ………. Total Cash Costs
$34,600 ………. Emergency Cash Reserves
============================================
$68,955 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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$579,000 1501 CARRIAGE Dr |
0.95 miles 5 bd / 3 ba 2,479 Sq. Ft. |
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$499,000 1605 West CARRIAGE Dr |
1.03 miles 4 bd / 2.5 ba 2,156 Sq. Ft. |
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$492,000 1916 West WEST WIND |
1.16 miles 3 bd / 2 ba 2,000 Sq. Ft. |
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$575,000 3088 PLATTE Dr |
1.47 miles 5 bd / 3 ba 2,358 Sq. Ft. |
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$554,900 2901 South CENTER St |
1.49 miles 4 bd / 3.25 ba 2,453 Sq. Ft. |
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$535,000 3144 COOLIDGE Ave |
1.92 miles 3 bd / 2.5 ba 2,397 Sq. Ft. |
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REO sales are declining and pace of foreclosure is steady
Declining REO Sales May Push Foreclosure Inventory Higher
by Jann Swanson Jul 31 2012, 9:07AM
The pace of foreclosure activity in the U.S. remained unchanged in June with 60,000 completed foreclosures, the same number as in May but 25 percent lower than the June 2011 total of 80,000. The number of pending foreclosures was also unchanged from May at 1.4 million homes or 3.4 percent of all homes with a mortgage and the year-over-year change was a single basis point decrease from 3.5 percent. There were 1.5 million homes in the inventory a year earlier. The foreclosure inventory represents the share of mortgages homes that are in some stage of foreclosure.
These figures were reported on Tuesday by CoreLogic in its National Foreclosure Report for June. The company said that there have now been approximately 3.7 million completed foreclosures since the financial crisis began in September 2008.
“While completed foreclosures and real-estate owned (REO) sales virtually offset each other over the past four months, producing static levels of foreclosure inventory for most of this year, they are beginning to diverge again,” Mark Fleming, chief economist for CoreLogic said. “Over the last two months REO sales declined while completed foreclosures leveled out. So we could see foreclosure inventory rising going forward.”
“The decline in the flow of completed foreclosures to pre-financial crisis levels is more welcome news pointing to an emerging housing market recovery,” according to Anand Nallathambi, CoreLogic’s president and CEO. “However, we believe even more can be done to reduce the inventory of foreclosures by decreasing the level of regulatory uncertainty and expanding alternatives to foreclosure.”
On a state level there continue to be distinct differences between states using a judicial foreclosure process and those which do not. The foreclosure inventory decreased or was unchanged on an annual basis in 24 of the 27 non-judicial foreclosure states (including Washington, DC) and in the three states where the rate increased the changes were 0.2 percent or less. In the 24 judicial foreclosure states the rate increased in 10 in a range from 0.2 to 1.3 percent. Over the past year the ratio of completed foreclosures to mortgages in the U.S. was 1 in 52.
Perhaps residential may be recovering (or perhaps not), but commercial is getting worse.
Trepp Reports Another All-Time High for CMBS Delinquency Rates
The delinquency rate for commercial real estate loans reached another all-time high in July, according to a report from Trepp.
Spiking up another 18 basis points, the CMBS delinquency rate stood at 10.36 percent, up from 10.16 percent in June and 10.04 percent in May. Last year at this time, the rate was 9.88 percent.
July’s increase is the fifth monthly rise and means the delinquency level is up 97 basis points since February.
The analytics company said the continued increase is due to a wave of five-year loans that could not refinance. Since most of the 2007 loans matured in the first half of 2012, Trepp predicts the rate should plateau in coming months, despite the jump in the delinquency rate in July.
In response to Trepp’s findings, David Tobin, principal at Mission Capital Advisors, said the delinquency rate remains elevated because of the market pressures all vintages of originations are experiencing.
“These include persistently high unemployment, which directly affects office and industrial demand and secular changes in how retail real estate interacts with consumers – or doesn’t as the case may be,” said
Among the five categories of properties, the retail loan segment was the only one which saw an increase.
The retail delinquency rate dropped 14 basis points to 8.03 percent.
The multifamily delinquency rate fared the worst and was up 52 basis points to 15.69 percent. The hotel delinquency rate followed behind at 13.06 percent while the industrial delinquency rate climbed to 11.72 percent. The office delinquency rate increased to 10.69 percent.
Hello Irvine Renter…I was in the CMBS industry (though at a low level) and what is happening now is due to the pressure to “get it out the door” in 2007…put together a package and securitize it to get out as much capital as possible before the train left the station, so to speak. Now these loans have matured. What is amazing is that even with the super low interest rates now (which makes DSCR targets much easier to hit) a lot of these properties cannot get enough new debt to replace the debt that is maturing. The reason is that in many cases rents and occupancy levels have declined a lot. This is especially true of the office sector. Companies are cutting back on their office space usage per employee. The buzz-word is “creative office space” which just means that no one has an office or even a cube…you share an open floor plan area with all your co-workers. Before the ratio of space per worker might have been 200 s.f. to one worker…now it is maybe 125, and will go down to 100 s.f. or so. As a result, even if we get back to full employment, we will not get back to full occupancy on a lot of these buildings. Of course office rents have been hammered as well. Retail is really struggling. Loans collateralized by retail properties are struggling as well. The problems with the apartment sector are rather surprising, since this sector has been strong in the last year or so.
I was recently looking for office furniture, and I was shocked at how much use office furniture is available at the various vendors around Orange County. It’s a great time to buy office furniture… if you need it.
Housing Slump Not Over, Mortgage-Bond Investors Say in Survey
Mortgage-bond investors aren’t convinced that the U.S. housing bust is over, according to a survey by JPMorgan Chase & Co.
Only 34 percent of respondents in a poll last week agreed that “home prices have bottomed nationally,” with 11 percent expecting values to fall an additional 5 percent or more, according to a July 27 report by the bank’s analysts. A total of 56 percent said prices will decline less than 5 percent.
A rally in the $1 trillion market for home-loan securities without government backing has been accelerating as investors seek higher returns amid benchmark interest rates that reached record lows this month. Bond buyers’ relative pessimism on the real-estate market adds to signs further gains may be possible, according to JPMorgan analysts led by John Sim in New York
“Our survey indicates that home price stabilization may not yet be priced in,” the analysts wrote in the report.
“…Seventy-one percent of the economists interviewed said they would not strategically default even if they owed at least 40% more than their home’s current worth. Fifty-nine percent of the homeowners interviewed also said they would not strategically default in the same situation. About 37% of those homeowners cited moral reasons, while another 35% said it didn’t make sense because they intended to stay in their current property for a long time.
“We were initially surprised that so few economists would be willing to strategically default, since when you do the math, it can often be the best economic choice, if you leave aside moral and ethical considerations,” said Zillow Chief Economist Stan Humphries. ‘Of course, strategic default is not just a mathematical decision. The most common reason for avoiding strategic default cited by homeowners was that it is a moral issue. That likely comes into play with economists and analysts, as well’…”
http://www.housingwire.com/rewired/strategically-default-or-not-question
If you’re struggling with your finances, it’s an easy decision to strategically default. If you aren’t, it’s not.
It’s funny too, because we’re (my wife and I) being “judged” for not strategically defaulting. Neighbors who have defaulted, will look at you incredulously when you explain that you don’t intend to default, and in fact, you intend to pay-down the mortgage to refi. It takes a few moments, but they then realize that their decision wasn’t so “strategic” because they really couldn’t afford their prior home.
” It takes a few moments, but they then realize that their decision wasn’t so “strategic” because they really couldn’t afford their prior home.”
Exactly. People who can afford their homes won’t strategically default even if the math tells them to. Most will just forget about the resale value of their properties and go on with life as if nothing happened. If they can afford their payments, in reality, nothing did happen. The fact that they are underwater only becomes a problem if they need to sell.
It’s the same in reverse. Many prudent borrowers did not add to their mortgages during the housing bubble. Although they may have noticed the illusion of wealth, it really didn’t impact their lives. They didn’t spend the gains, so the loss in value is also a moot point. It’s the same as the stock market and the value of people’s retirement savings. It goes up, and it goes down. It doesn’t matter until you need to sell.
I imagine you wished the value of your house went up but it won’t matter much in the long term. Now that you have paid down your mortgage, you will be able to move up. If prices had risen, the cost of your move-up house would also have risen, to you’re no farther away from that because prices fell. In fact, since you are the rare exception who actually paid down a mortgage, when you are ready to move up, you should have far less competition. Of course, that assumes lenders finally start foreclosing on all the squatters in your move-up neighborhoods.
BTW, articles like this are plants from the banking industry that is frightened to death about the prospect of so many of their borrowers defaulting prior to house prices recovering.
Funny, today on the OC Beach New blog
Negative Equity Problem Could Make Foreclosure Crisis Even Worse
Negative Equity Problem Could Make Foreclosure Crisis Even Worse
July 27, 2012 The Home Front
Just when you thought the housing market might be on the mend, news that foreclosure activity is on the rise across the country reopens a painful wound.
Almost 60 percent of the nation’s largest metropolitan areas saw increased foreclosure activity in the first half of 2012, according to a recent report from foreclosure information website RealtyTrac, with troubled states California and Florida cropping up again as major sources of the country’s foreclosure woes.
As if that weren’t bad enough, things could get a lot worse thanks to the gigantic negative equity problem, which has pushed many homeowners to the brink of foreclosure and put immense pressure on household finances.
Loans currently in the foreclosure process amount to about $45 billion in negative equity, according to RealtyTrac CEO Brandon Moore. But that figure balloons to $1.2 trillion when you add in the more than 12 million underwater mortgages that haven’t started the foreclosure process —26 times the negative equity currently associated with troubled loans.
“40 million Americans choose to pay a mortgage every month and even if just a small fraction of those choose not to do so, things can compound and get much worse pretty quickly,” Moore says.
” “40 million Americans choose to pay a mortgage every month and even if just a small fraction of those choose not to do so, things can compound and get much worse pretty quickly,” Moore says.”
This could bankrupt the banking industry. Realistically, it probably already has. we just don’t know it because the bank’s cost of capital is now zero, so they can hold these nonperforming loans on their books forever.
I have been enjoying some correspondence with Keith Jurow. His data on New York says the problem with delinquent mortgages is much, much worse than commonly reported.
Unless you can back up your proposal by showing the numbers of high wage earners delinquencies is much less than the lower wage earners using the same FHA program (and you have 3 years of data according to your chart linked below FHA share of OC market), what you said here is merely speculation.
http://ochousingnews.com/news/fha-mortgage-delinquencies-skyrocket-more-than-25?source=Patrick.net
I might come across as a confrontation but I really don’t understand your logic without the proper data. If FHA uses the same program to 2 different groups of users A1 (lower income) & A2 (higher income), the same possible outcome applied to the 1st group is also applicable the 2nd group unless affordability is factored in as perspective outlined above. And un-affordability could also applied to high wage earners if their living style is way out of line with their income.
This idea only works if house prices have bottomed. If house prices continue to slide, larger loans simple make for larger losses. I am assuming the housing market has bottomed (and it may not have bottomed yet), so even if the high wage earners default as well, the resulting default losses will be small because the capital recovery will be better.
What the program needs is more fees, and they won’t generate much more in the way of new fees with $150,000 mortgages. If they start loading the system with $700,000 mortgages, the income rolls in much faster.
The goals are:
1. Rewrite the loans to remove the liabilities from the bank to the taxpayer
2. Rewrite the loans to generate fees for the banks without any of the banks’ money at risk.
3. Write new loans with almost nothing down at inflated prices to justify high housing prices for #1 and #2 above. Repeat goals 1 to 3 under different programs as possible.
4. Buy as many votes as possible and leave before the new loans melts down.
Unfortunately for those proclaiming ‘recovery’ has finally arrived, current values are based on preservation of systemic failure, continuance of negative real rates, massive govt subsidies/welfare and the bernanke ‘put’ to carry macro.
LMAO!!!
Expect strategic default #’s to head skyward…
Breaking: FANNIE AND FREDDIE WILL NOT LET HOMEOWNERS WRITE DOWN PRINCIPAL
http://www.businessinsider.com/fannie-mae-and-freddie-mac-will-not-write-down-mortgages-2012-7
These plans are just too fraught with fairness problems. Nearly every plan designed to “help” homeowners tries to dance delicately between two lines:
No, you cannot receive any help if you bought a house you could afford and are not in financial distress;
No, you cannot receive any help if you bought way too much house and couldn’t even afford it with a serious mod and writedown;
Yes, you Mr. & Mrs. Homeowner may receive help because you stretched yourself the exactly perfect amount and are in serious, but not downward spiraling distress.
Or try to push it with the eminent domain of mortgages.
[...] ———— Zillow: Buying Better Option than Renting for Most of U.S. – BY: TORY BARRINGER – DS News ———— (not US mortgages) BONDS: RBC to play to widest audience with SEC-registered covered bond – Royal Bank of Canada is gearing up to sell the first SEC-registered covered bond into the US market at the end of August, a move that will give the issuer access to the widest possible investor base. – International financing Review ———— (talking again) BofA in talks with Fannie Mae over mortgage dispute -sources – By Rick Rothacker – (Reuters) * Talks have become constructive, but settlement not imminent * Bank, Fannie fighting over requests to buy back soured mortgages * Bank’s total claims increased by more than 40 percent in second quarter ———— (breakeven horizon) Zillow Has A New Metric That’ll Help You Decide Whether To Buy Or Rent A Home – Mamta Badkar – Business Insider ———— (delevering?) Freddie: 81% of Q2 Refis Upheld or Slashed Debt – BY: TORY BARRINGER – … Of these borrowers, 59 percent maintained about the same loan amount (the highest share ever recorded), while 23 percent reduced their principal balance by paying-in additional money at the closing table … – The M Report ———— Why DeMarco Is Right To Deny Mortgage Write-Downs – by Donna S. Robinson – … The FHFA Director cites analysis which indicates that the benefit to be gained by writing down mortgage principal is very little when compared to the real costs of such an undertaking. He is adamant that his choice, while tough and certainly unpopular for him, is the right one for the taxpayers. And right or wrong, I applaud him for that. We need more regulators with the guts to stand up to politicians, when it comes to protecting the taxpayers. … – Realty Biz News ———— To prevent an FHA bailout, lower the conforming limit on GSE loans – OC Housing News [...]