Top five secret reasons to use FHA financing
Most borrowers don’t realize the hidden benefits of using FHA financing they can use to game the system to their advantage.
Most first-time homebuyers use FHA financing because they lack better alternatives. FHA insured loans carry weak qualification standards (they accept FICO scores down to 580), they don’t limit debt-to-income ratios, and they only require the borrower to put 3.5% down.
Most would-be homeowners know the FHA loans are easy to qualify for and require little savings, so the primary reasons for using FHA loans are not a secret. These loans also carry significant costs and fees that make them less attractive to buyers with sufficient resources to put 20% down; however, there are five secret reasons everyone should consider FHA insured financing.
1. Maximum return on investment
When buying any investment, the less of your own money you put into the deal, the greater the possibility of stellar returns, and your risk of loss is limited, creating a strong 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.
2. Stoploss Protection
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.
3. Forebearance if unemployed
There are additional benefits to going with an FHA insured loan. There are many programs to help you if your income declines, including forbearance. There’s also a streamline refi that allows a quick refi with no appraisal or income checks. The mortgage insurance expensive on a 30-year loan (but half of what it was a year ago), but worth the cost if you’re a marginal buyer maximizing your purchasing power and stretching your budget (and therefore can reasonably anticipate using many FHA homeowner aids).
4. Easy to strategically default and 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.
5. FHA Typically doesn’t pursue deficiency judgements
The FHA has a policy of not seeking deficiency judgments (when they’re available). So if you refi into an FHA in California, there’s an added benefit. However, starting in 2013, CA law allows a “continuous purchase money” character to remain. i.e. If the refi after 2012 refinances only the remaining principal from the purchase mortgage, no deficiency is available. If any cash is taken in a cash-out refi, then that amount is subject to a deficiency judgment.
Apparently, in their desperation to save the banks from losses on underwater borrower defaults, the powers-that-be openly encourage FHA financing irrespective of the potential losses to the US taxpayer.
by: Jann Swanson, February 11, 2016
In a hearing on Thursday before the House Financial Services Committee, Edward L. Golding, Principal Deputy Assistant Secretary of the Department of Housing and Urban Development (HUD) said that the value of the Federal Housing Administration’s Mutual Mortgage Insurance (MMI) Fund has improved by $19 billion in the last year. The Fund fell into negative territory during the housing crisis, battered by poor performance of its guarantee portfolio.
Golding said the Fund increased from $4.8 billion in FY 2014 to $23.8 billion in the most recent year, a total of $40 billion in growth since 2012. The Fund, which is required by Congress to maintain a capital ratio of 2.0 percent, has improved since 2012 from a negative 1.44 percent to a positive 2.07 percent. Further, the Independent Actuary’s 2015 review predicts that the Fund will finish 2016 with a ratio of 2.77 percent.
Golding said the underlying fundamentals of the FHA portfolio are strong and show positive performance in credit quality, reduced delinquencies, and higher recoveries on distressed assets.
Higher recovery on distressed assets is exactly why the government colluded with bankers to reflate the housing bubble, and as I pointed out recently, Manipulating for-sale home supply succeeded wildly for bankers. Government bureaucrats hoping to avoid losing face with an FHA bailout are pretty happy about it too. Unfortunately, they moral hazard of the five secret benefits of FHA financing create the conditions for the next bailout.