Apr032012
FHA mortgage premium may rise to 2.05% and delay the recovery
Over the last five years of falling real estate values, the government and federal reserve has done everything in its power to prevent the price collapse.
The FHA was pressed into service as a replacement for subprime lending, and it became the only financing available for first-time buyers with less than 20% down. The current FHA minimum down payment is only 3.5%, which effectively puts every buyer underwater when transaction costs are factored in.
Since the FHA has originated over a trillion dollars in loans, most of which are underwater, and since prices are still falling, the delinquency rate on FHA loans has been steadily rising, and the loss severities are very high. It’s no big secret that the FHA is facing the prospect of a bailout, and it’s also no secret that politicians really don’t want to approve one.
As a result, Congress is now considering raising the FHA mortgage premium to a whopping 2.05% — a rate double the California property tax rate. In fact, that would be a nice rule of thumb to estimate the FHA insurance premium; take your estimated property taxes and double it. That’s how much the FHA insurance will cost.
Obviously such an increase in the cost of an FHA loan will help the FHA avoid a bailout, and Congress may pass it for that reason, but it will also have a devastating effect on the housing market. First-time homebuyers are the housing market. The move-up market using conventional financing is dead due to lack of equity and savings. Any increase in the cost of FHA insurance is going to reduce available loan balances as the cost of FHA insurance directly reduces the amount available to support a mortgage. Smaller loan balances translates to lower bids and ultimately lower prices. The combination of rising interest rates and increasing FHA loan fees will destroy any market recovery.
FHA bill to boost MIP caps moves forward in House
A House committee voted unanimously to pass a bill that looks to give a boost to the Federal Housing Administration through increased mortgage insurance premium caps and other changes.
The FHA, under the bill, could charge up to 2.05% for its annual mortgage premium, up from a current 1.55% maximum. It also sets a minimum of 0.55% for the yearly payment.
The current FHA maximum of 1.55% is only charged on loans between $625,000 and $729,750. The rate for everyone else is 1.2%. An increase to 2.05% is a 70% in the cost of FHA insurance. On a $400,000 Orange County loan, that’s an increase from $400 per month to $683 per month. At 4% interest rates, a decline in payment of $283 per month will reduce loan balances nearly $60,000. That’s a 15% reduction on a $40,000 loan, and it will equate to a 15% decline in house prices to match.
Those premiums are set to rise by 10 basis points in April to 1.2% for new mortgages, or 1.25% for loans with a loan-to-value ratio above 95%. That increase stems from a December law that temporarily extended a payroll tax cut.
The House Financial Services Committee agreed to the bill, H.R. 4264, by voice vote Tuesday, more than a month after approval by a subcommittee.
“These are commonsense, targeted changes that would ensure accountability and financial stability within the FHA,” said the bill’s sponsor, Rep. Judy Biggert, R-Ill.
The Department of Housing and Urban Development could also force lenders to pay HUD back if a loan goes bad and it finds fraud or misrepresentation in the underwriting process.
The bill, at the same time, calls into question the fiscal solvency of the FHA, specifically its insurance premium reserve fund.
Nobody truly believes the FHA is solvent. Politicians are proposing this legislation to head off an more difficult and damaging bailout of the FHA. Unless one of the two parties believes they can gain advantage by blocking this stealth bailout, some version of this bill will likely pass. When it goes into effect, it will have a predictable negative effect on house prices.
The FHA would have to submit an “emergency capital plan” regarding its financial security, including whether it would have to dip into Treasury Department funds. The bill also requires the FHA to review its actuarial report process, or assessment of the insurance fund, to verify its accuracy.
Verify its accuracy? They have avoided a bailout so far by making unrealistically rosy estimates of future losses. What will prevent them from doing that again?
The mortgage insurance fund fell to 0.24% in 2011, below the required 2% threshold.
Since they aren’t enforcing current laws, I have my doubts about the efficacy of this new law.
The committee rejected two amendments to the bill that would have lowered the FHA insurance guarantee to 80% from 100% of a loan balance, and require the agency to max out its premiums until it meets that 2% requirement.
Lowering the guarantee to 80% of the loan balance would leave risk of loss with someone. Would this be on the originator? Who is going to be willing to take on this risk, and how would they be compensated in the transaction. This has the potential to severely curtain FHA lending.
In debate, Rep. Barney Frank, D-Mass., said he’d “hate to see” controversial amendments to an otherwise bipartisan measure.
“At this point, to send a jolt to the housing market I think is a mistake,” Frank said.
The FHA bill moves to the floor of the House for consideration.
Something will be done to avert an FHA bailout. Despite the ominous ramifications for the housing market, Congress will pass this bill in some form, the ramifications of an FHA bailout looms larger for Congressmen and their reelection chances than passing this bill and dealing with the resulting drop in prices.
Real Estate Purchase Contract Cancellation rates are at a record high
by Mike at North Orange County Housing News
I think an increase in cancellations is good sign, there are issues, but it’s an correction we need in the market. It means the bank lending standards are returning from normal from the no job, no income, no problem type loans. I think the agents hate it because it keeps them from churning sales in real estate market, except for the steering they do in short sales.
MORE
High cancellation rates is also a sign that the rally is going to fizzle out. People are trying to buy and going into contract, but since they can’t qualify for the loan, they fall out, and the sale dies.
A few days ago, a local real estate market study firm noted that prices have been rising over the last three months. Their study relied on contracts rather than closed sales. The record cancellations is going to derail the accuracy of their study.
Grim Housing Data Shows We Have Not Hit Bottom
By MICHELLE HIRSCH, The Fiscal Times
March 29, 2012
A new string of grim housing data confirms what economists and analysts have long predicted: the housing market has yet to hit bottom, and once it does, it will be a long slog back to health and stability.
The nation’s heap of completed foreclosures remained steep, barely budging to 65,000 in February compared to 66,000 one year earlier, according to new data released by CoreLogic Thursday. The percentage of American homeowners more than 90 days delinquent on their mortgage payments, including those in foreclosure, rose to 7.3 percent in February compared to 7.2 percent a month earlier. However, the rate is still lower than the 7.8 percent of delinquent homeowners logged in February 2011.
According to today’s report, 3.4 million properties have gone into foreclosure since the financial crisis in September 2008. About 1.4 million, or 3.4 percent of all properties with a mortgage, were in the foreclosure process in February—a 0.2 percent drop from February 2011.
That follows new data from the S&P/Case-Shiller Index that U.S. home prices sank in January for the fifth straight month to the lowest level since 2003. Additionally, separate reports from the National Association of Realtors and CoreLogic show existing home sales and previously owned homes under contract shrank in February. The number of bank-owned homes either in the foreclosure process or seriously delinquent—the so-called shadow inventory—remained unchanged from six months earlier at 1.6 million units.
“We’ve still got millions of foreclosed homes waiting to come on the market, so we’re not going to see any dramatic rebound in house prices,” cautioned Paul Ashworth, chief economist at Capital Economics. He predicts over the next few months that home prices will slowly start to rise, which will slowly nudge homebuyers back into the market and lead banks to start loosening lending criteria. “But property is a slow-moving asset, unlike stocks or equity where things can go up or down ten percent in a day. We’re not going to get a rapid rebound after the housing bust we just went through.”
Other economists expect home prices to plunge further. “Our view is that foreclosures, excess supply, and weak demand will drive home prices as measured by the Case-Shiller indices down at least another 5 percent,” said Patrick Newport, a U.S. economist with IHS Global Insight.
Despite the apparent examples of stagnation, and even decline, some housing analysts say there are signs that better times are ahead for struggling current and potential homeowners. “The housing market is showing some signs of shaking off the depression-like conditions that have plagued it for much of the past few years,” wrote Freddie Mac chief economist Frank Nothaft in his March 2012 Economic Outlook report, referring to modest rises in seasonally-adjusted housing starts over the past 12 months.
And the latest CoreLogic report notes that 61 of the 100 U.S. regions it tracks saw their foreclosure rates fall slightly compared to a year ago. Moreover, U.S. home sales currently embroiled in the foreclosure process accounted for a growing number of U.S. home sales last year, rising to 24 percent of all homes at the end of 2011, compared to 20 percent in the third quarter. That, some experts say, signals that delinquent property sales could boost the housing market this spring. “With the spring buying season upon us, the inventory may decline further as the pace of distressed-asset sales rises along with the rest of the housing market,” said Mark Fleming, chief economist at CoreLogic.
I’m all for raising the FHA insurance rate. Many of the people buying today have NO BUSINESS being loan owners. At the rate we are going, there will be distressed properties in the pipeline for years to come.
Like I said yesterday, why buy today when things will only get better later on in the year…
I agree.
IR, great article, but I am surprised you had such a negative spin (“…devastating effect…”). You are starting to sound like Barney Frank 😉
The spin makes the article interesting…
Actually, I really believe such a large increase will have a strongly negative effect on the market. The increased borrowing costs will not help lenders get higher prices for their REO.
With so many deals falling out of escrow, it looks like lenders agree with your assessment of the viability of today’s crop of buyers.
This is a great blog post – I enjoyed reading it & gained a lot – on a side note, I am turning big 40 – yes ! I know getting old but that’s a part of life. I am actually quite blessed with a good family & very obedient kids; anyways – as the 40 is hitting I am realizing that I have not done a great job with my retirement planning. One of my wife’s cousin is a an agent with Bankers Life so I reached out to him over the last weekend – it seems that they have great products from life insurance to annuities & they work with individuals to provide great service & plan for the retirement. Does anyone here had any experience &/or know any other companies whom I should checkout before signing up with Bankers Life and Casualty Company. Any feedbacks will a great help – just FYI – I am planning to retire at/around 68 yrs of the age.
Is this the next generation of sophisticated link spam or a sincere request for information?
Pretty slick if it is link spam. Whats the world coming to? Spammer defiling this humble blog?
IHR – do you get that much traffic that the spammer are out to get you?
According to my stats, I get about 15,000 unique visitors each month. That plus the page rank of 5 gets me spam plus email solicitations for link exchanges and offers to write posts for me.
It is spam, and from my chair it is not that slick.
It does show much more sophistication than earlier spam. Consider:
“This is a great blog post – I enjoyed reading it & gained a lot – ”
Starts with ass kissing in hopes the blogger doesn’t delete it.
“on a side note”
Plausible reason for spam.
“Any feedbacks will a great help”
Makes the spam look legitimate. This one fooled me.
” – just FYI – I am planning to retire at/around 68 yrs of the age.”
Looking for bonding from target market.
This is the most sophisticated spam I have seen to date.
Yeah, I guess so.
As soon as I read the flattery, I was suspect. Nothing brings up my warning radar like flattery.
It’s not a spam. It’s just a request for information.
I was looking at the FHA/HUD site and making a quick study of their history as an organization and their purpose.
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory
They seem to be quite proud of the change in the market since Roosevelt’s New Deal and federal banking system overhaul back. In 1934 supposedly only 40% of Americans owned homes (homedebtors) and 60% rented. Was that a “problem” in and of itself that required a federal program to solve? I don’t know.
Then it says in 2001 “homeownership soared to an all-time high of 68.1%” . I like the additional .1 of a %. As if that extra significant digit puts HUD over the top or something. I guess so. Still, that’s circa 70% “homedebtorship”. Hurray?
I don’t know exactly how things stack up in 2012 – whether it’s 50% rent and 50% are homedebtors, but I find myself puzzled by the application of the FHA charter in current times. It seems to me that the US government is incompetent on such matters and should get out of the insurance business altogether and just leave it to the experts (i.e. insurance companies) who sort of understand risk analysis and otherwise know what the hell they are doing when it comes to creditworthiness and risk premiums.
Given the upcoming bailout of FHA, which is definitely coming after all of the ballots are cast in November, this claim that the FHA/HUD “operates entirely from its self-generated income and costs the taxpayers nothing” is nothing but a total lie and should be removed from their website.
The government believes homeowners are more invested in their communities and less prone to bouts of civil unrest. Perhaps there is a kernel of truth in that idea, but what about homedebtors? Are people who are trapped in their homes with no equity equally as desirable? Only time will tell.
I suspect your timing of the bailout is correct. Unless one party or the other finds a way to spin it to their advantage, neither side will force the issue until later.
I am not a fan of long-term policies to subsidize indebtedness and higher levels of home “ownership” as some sort of desirable social good that is beyond question, as if to second-guess this principle is treason or immoral.
That said, the country of Roosevelt’s time was a far different beast from today’s. There were clear lines between social classes and even the upper classes were aware of this, and also aware of hostility from the lower classes. During the 1930s, many people felt the system did not, and would never, work for them, and had decided that it should be replaced. Roosevelt thought that there was a good chance of a left-wing uprising if something was not done, no matter how crude, to level the inequalities of opportunity; I have read that he was actually concerned that somebody might run against him from the left as a socialist/populist – Huey Long, maybe.
So, in my view, the problems Roosevelt was trying to solve were vastly different from anything we face today, and there was enough alarm that he had plenty of opportunity to throw everything at the wall in hopes that something would stick. Some changes made for a better-educated and more productive work force. Others, like the subsidies for housing which continue today, helped in the short term but now serve mostly to create a wealthier and fatter class of bankers.
And though I admire Roosevelt for many things, I believe he enabled a political culture of permanent subsidy for housing. Later administrations bear the guilt for perpetuating it, but Roosevelt began the chain.
It has gone on so long now – no one is alive who was an adult when forking over 50% was the norm for a mortgage – that we tend to think that 30-year mortgages are a sane and balanced practice, when, in reality, no asset requiring such servitude should be regarded as a sane investment.
Well written Cabron. I lifted the following text from Wikipedia and inserted my own words, but I believe the housing industry is the same as the old 40 acres that you will never own….just pay on forever.
“40 acres and a mule (unlimited lending) refers to the short-lived policy, during the last stages of the great real estate bubble of 2000-2006, of providing a home for everyone who wanted one to current wage slaves who had become indebted as a result of the advance of the complete stripping of all financial regulation into the territory previously controlled by the laws and acts to protect against speculation and corruption.”
QE 3 might be off…..but I wonder. Breaking news
So if mortgage rates increase to 5% in one year, then 7.05% FHA insurance premium. Just wow.
The numbers are a bit off. Also, FHA is an insurance program, not a mortgage origination platform BTW.
FHA insurance comes in two versions: An Up Front Mortgage Insurance Premium (UFMIP) and Monthly Mortgage Insurance (MMI)
Here’s the data from HUD:
Effective 4/9/2012 (meaning last day to preserve the old rate is 4/7)
UFMIP is going to increase from 1.0% to 1.75%
The MMI increases depend on the down payment and the loan size:
15 year data is not shown. They are pretty rare deals now a days.
95% MMI is 1.25% for loans under $625,500 (term longer than 15 years)
In June 2011 the MMI increases for loans over $625,500 (OC Market loans)
95% MMI is 1.50% for loans over $625,500 (term longer than 15 years)
For comparison purposes, a 95% Conventional loan with Private Mortgage Insurance does not have the UFMIP charged. The monthly ranges from .78 to .95 depending on FICO scores.
The UFMIP and MMI increases are also going to kill off the ability for borrowers to refinance out of the loans they’ve got – that is for anyone who purchased after May 2009. Loans originated prior to that time period can refinance at a very low MMI expense.
FHA insured products will be niche loans for credit challenged borrowers with little or no savings ability, offered to clients at a much higher than market cost compared to private or bank loans. Sound familiar? It should. That’s the business model of sub-prime lending, predatory and unsustainable.
My .02c
Soylent Green Is People
The posting system pulled some of the data out. It should have read:
Loans with more than 5 percent down the MMI will be 1.20 percent (up to $625,500)
Loans with less than 5 percent down the MMI will be 1.25% percent (up to $625,500)
Loans with more than 5 percent down the MMI will be 1.45 percent. (from $625,500 to $729,750)
Loans with less than 5 percent down the MMI will be 1.50 percent. (from $625,500 to $729,750)
Thank you for the clarification.
SGIP, the UFMIP is a pretty big increase from 1 to 1.75% by the end of the week. I wonder if this had anything to do with the recent uptick in sales to lock the old rate in before the end of the week. That’s several thousand dollars on your average loan around here.
Yes, I know firsthand that there are people pushing to get deals locked in before the increase.
@ Irvine renter
what do u have to say abt this article
http://finance.yahoo.com/news/investors-looking-buy-homes-thousands-134405371.html
I have been advocating buying rental homes for nearly two years now. I only wish I could have picked up more before the herd came to see it was a good idea. Now I am going to have to pay more, and the rental returns won’t be as good.
Good, perhaps they can buy my foreclosure here in Lake Forest and then turn around and make a profit off one of you…yup, the psychopath capitalist society is running rampant again.
We have turned into a nation where we are only our brothers keeper if we can make a profit off him/her.