Rising down payments and loan costs hindered the housing recovery

Besides credit qualification barriers due to low FICO scores, there are two barriers to originating more loans and selling more houses to owner occupants: (1) insufficient down payment, and (2) increasing loan costs. The FHA still originates loans at 3.5% down, and the credit barriers are limited, despite realtor pleas and rhetoric to the contrary. However, since the FHA is losing a great deal of money and facing a bailout, they are continually raising their insurance fees as they become the replacement for subprime lending. These increasing costs are making houses less affordable and thereby reducing access to credit. As a result, many borrowers are opting for conventional mortgages with their higher down payment requirements. And since fewer potential buyers have the available cash saved for a down payment, the increasing costs of FHA loans which drives people to conventional mortgages is further reducing the buyer pool. This will inevitably lead to less demand.

Homebuyers put more money down

Posted by Megan Hopkins on November 14, 2012 11:01 AM

A recent survey from the National Association of Realtors recent survey shows that with a recovering housing market and more borrowers choosing higher down payment conventional loans versus FHA loans… .

The high cost of FHA loans is clearly driving buyers away, and it will only get worse.

Of the surveyed homebuyers, 87% used a mortgage for the purchase. Typically 91% of the home was financed, requiring a 9% down payment.

… With tighter credit standards than before, homebuyers are different than in years past. Married couples comprised 65% of recent homebuyers, the highest share since 2001. When married, couples hold the advantage of more buying power and added financial stability, in addition to higher household incomes.

The average down payment is only 9% nationally, and 87% used a mortgage. Those numbers reflect just how weak the recovery is. If down payment requirements go up — which they likely will when the Dodd-Frank qualified mortgage requirements are finalized, the buyer pool will get squeezed even further. Despite the fact that about 30% of homeowners have no mortgage, those aren’t the people buying today. Nearly everyone is borrowing money to buy homes which makes the housing market vulnerable to changes in lending costs and requirements. And it’s likely these requirements will get stricter, and costs will go up due to huge losses at the FHA.

FHA to Boost Fees, Sell Delinquent Loans to Close Deficit

By Clea Benson and Cheyenne Hopkins – Nov 16, 2012 2:57 PM PT

The Federal Housing Administration, which ended fiscal year 2012 with a $16.3 billion insurance-fund shortfall, will raise premiums and sell delinquent loans to avoid taking aid from taxpayers for the first time in its 78- year history, agency officials said today.

The FHA has no choice. They operate on the subprime lending model subject to high delinquency rates. In a declining or weak market, that translates into large losses. In order to cover the costs of these losses, they must either get a massive bailout or raise their fees.

The government mortgage insurer’s assets won’t cover projected losses on the $1.1 trillion portfolio of mortgages it backs due to mounting defaults on loans issued as the housing market collapsed, according to a report issued today by an independent actuary. …

Should we pretend to be surprised by this?

The report’s negative outlook set off a renewed debate among federal lawmakers over the proper role of government in the U.S. housing market.

Yes, it has. The FHA should not loan to Ponzis to reenter the housing market.

Republican members of Congress responded today with calls to shrink the government’s footprint. Together, the FHA and U.S.-owned Fannie Mae and Freddie Mac guarantee more than 90 percent of U.S. home loans.

As if we needed another example to show we need broad comprehensive reform in ending these taxpayer giveaways, this is one more example of it,” Representative Scott Garrett, a New Jersey Republican who sits on the U.S. House Financial Services Committee, said in an interview. …

The Republicans are right on this issue.

Democrats defended the agency’s historic role enabling low- income families to purchase homes with low down payments.“At a time when the private market constricted, FHA stepped up, providing crucial liquidity and access to the mortgage market,” Representative Maxine Waters of California, a Democrat on the Financial Service Committee, said in a statement.

The FHA has historically played the role of lender-of-last-resort, and perhaps there is some value in this. The housing collapse would have been twice as brutal without the FHA. Much of the Republican posturing ignores the inconvenient fact that the FHA saved their campaign donors — the too-big-too-fail banks — greatly benefited from the FHA absorbing these losses.

Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, said he was “deeply concerned” by the actuary’s findings and would call Secretary of Housing and Urban Development Shaun Donovan to testify at a hearing after the U.S. Thanksgiving holiday.

Is finding a scapegoat the solution? Both sides are disingenuous, and they need someone else to blame for the policies they put in place. Politics as usual.

Most of the FHA’s new revenue-generating policies will go into effect in January. The annual premium FHA charges borrowers in return for guaranteeing loans will rise by 10 basis points on new mortgages, an average cost of about $13 per month for borrowers. The agency also will no longer allow some borrowers to stop paying premiums after 10 years.

This won’t likely be the last increase in FHA insurance premiums. The fund has not turned the corner on delinquencies or their associated losses.

FHA will provide deeper levels of payment relief for borrowers who receive loan modifications to avert foreclosure.

In addition, FHA will expand short sales and continue auctioning off at least 10,000 delinquent loans every quarter, urging investors who buy them to take steps to keep families in their homes.

Those policies will only worsen the losses on FHA loans.

FHA Acting Commissioner Carol Galante declined to speculate on whether these measures would be enough to keep the agency from seeking Treasury assistance.

“At this point in time, it’s literally impossible to say whether we will or won’t need a draw,” she said during a briefing for reporters in Washington. “We are doing this to increase the likelihood that we will not.”

Bullshit. 17% of FHA loans delinquent in September, bailout coming

More than 17 percent of all FHA loans were delinquent in September, according to data on the agency’s website. The agency has lost $70 billion on loans it insured from fiscal years 2007 through 2009.

Down Payments

The report blames the fund’s losses largely on loans in which sellers were allowed to cover the down payment on behalf of the buyer, often by inflating the price of the house and reducing equity for what may been an otherwise unqualified buyer. Congress banned the FHA from backing such loans beginning in 2009.

This policy change was greeted with howls of protest from homebuilders and realtors who decried the loss of business. Both groups obviously don’t care about taxpayer losses as they lobby for their own selfish ends.

FHA currently backs 15 percent of U.S. mortgages issued for home purchases. The agency provides liquidity to the housing market by insuring lenders against losses on loans with down payments as low as 3.5 percent. Lenders are made whole if the mortgages default. …

For the agency’s 2012 report, its actuary changed the economic modeling to include less-optimistic home-price projections and a revised assessment of loans from earlier years that have been refinanced more recently.

The previous reports were a charade intended to deflect criticism until after the US election. Now that Obama is back in office, we can deal with the problem everyone preferred to ignore.

Hindering the recovery

Rising costs of FHA loans will make those loans less desirable, and they will reduce the overall buyer pool able to afford homes. This will hurt the housing market. Will it reverse the so-called recovery? I don’t know, but it certainly won’t help.