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"Cheery" Words - Unlikely Source
David Stevens the boss at FHA made some comments today that caught my
eye. The full story here.
Some highlights:
On the status of the US mortgage market:
“This is a market purely
on life support, sustained by the federal government.”
FHA is now doing more business than both Fannie and Freddie. The reason
is FHA is still offering 3.5% down payment mortgages. Mr. Stevens
thoughts on this:
“Having FHA do this much volume is a
sign of a very sick system.”
On the status of FHA’s “book”:
"FHA has been taking steps to shore
up its program after being left with “terrible portfolios” from
2007 and 2008."
The FHA, Fan and Fred now account for 90% of U.S. home lending. Stevens
is right, the system is sick. An obvious way to decrease the percentage
of the federal involvement in the mortgage market is for the Feds to
stop lending money on terms the private sector would not. An easy way to
achieve this is to reduce the geographic lending limits for all the
D.C. lenders to where they were in 2007-08, that was about $417k. That
number was goosed up to over $700k for a number of areas in 2009.
The temporary limits will expire at the end of this year. After the
shellacking that the “ins” are likely to take on the issue of “big
government” this coming November it is likely that the temporary limits
will be allowed to expire. At a minimum, significantly lower levels may
be set.
The good news is that the vast majority of states, towns and cities in
the country will not be impacted. Their limits are already less than
$417,000. The bad news is that the major metro areas will be hard hit.
The following cities could see a drop in federal lending by as much as
$300,000.
Metro areas:
D.C.
Baltimore
Boston
NY
LA
San Francisco
Seattle
Sacramento
“They” are going to have to do something. It is not sustainable for the
federal government to be 90% of the market. The head of the FHA has said
so. Cutting the limits is an easy way to do it. Possibly a RE play is
to barbell the country. Go long Chicago and Dallas and short both
coasts. If that is too complicated, just go short.
Note:
There are some areas where federal lending limits are “silly” high. To
me it looks like a subsidy for rich people. When the limits are
considered I would be surprised if there were not some adjustments. Key
West, Nantucket and damn near every ski resort town in Colorado, Utah
and Wyoming are over $700k, more than 3xs the national average. Possibly
some additional short “fodder”.
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One thing that could make a huge difference is to eliminate or vastly reduce the tax deduction for interest and taxes on a personal residence. This deduction has only enabled the real-estate bubble and subsequent crash. Maybe this sacred cow was necessary at one time, but it should have been curtailed many years ago so that money could flow into production and manufacturing instead of McMansions.
Good thought. I agree. We are going to end up with a number of changes. The downpayment % number, the max limit issue, tax changes etc.
To me it all spells that RE has no future, again. Add to that a new forecast for a slowdown due to Europe/China. Where is my cyanide?
You too can live rent free! A great graph to digest:
Payment free foreclosure rates.
I got a reverse mortgage before the SHTF. Just in time, then the business volume dried up right after. So far i have been lucky, made all the right moves. But i cant help but think how many reverse mortgages there are, many insured FHA. Most lost value and have zero equity. Thats gotta hurt.
When Paulson made them wards of the state a couple of years back, I recall him talking about putting Frannie into runoff mode over the course of 10 years and ultimately backing them out of the business of securitization altogether. Banks were supposed to hold covered bonds on their books.
I'm not hearing anyone make so much as a peep about a plan for how the US government is going to extricate itself from Frannie and put it into runoff mode. Are we just supposed to keep taking $100b in losses every year indefinitely?
I don't see how anything ever changes, especially if there comes a time when rates go higher.
Love the bridge to nowhere Bruce...it's exactly where this is going, with the sheep pushing those in front off the cliff. And thanks for pulling out these shockingly honest quotes. In the article it amazes me that they continue to tout the $237 million of jumbo mortgages by Redwood Trust and Citi last month as a sign of good times. While not as liquid as those under the limit, new issuance of a mere $237 jumbos is nothing to crow about.
These new FHA's with 3.5% down are doomed. Housing market falls 5% and the new owners are already behind. I think the housing market falls another 25-40% for a number of reasons, the following just a few:
1) FHA loans are at the top of the list with 3.5% down in depressed markets that will get much more depressed.
And we can't forget Fannie and Freddie: "It’s a much better environment than any time in the recent past for borrowers who want to buy homes. As a result, more than half of Fannie Mae loans for home purchases have been to “low-to-moderate income families.”
Great--and of course unemployment is going down since we have Census workers now and Ford brought home a whopping 160 jobs!
2) The shadow inventory yet to be released from the foreclosure world will be a another time-release bomb on prices.
3) The boatload of resets in the Option Arms department that could not be modified due to no home equity, no money, or the employment status of the homeowner are yet to happen in the next 16 months
4) Those squatting in their houses and not making payments will eventually be REO's, like it or not, because the banksters are not going to put up with this shit forever.
Put it all together and we have our next leg down in the housing market meltdown. Made to order by TPTB. Thanks FHA for being the biggest dupe in this game--and Ben and Timmay for giving hope to the hopeless.
IMHO, the securitization of plain vanilla, well documented, 20% down MBS was one of the best ideas ever created in the bond market. It made a great deal of sense for smaller banks, S&L's, mortgage bankers, et. al. to have an outlet to sell their paper with minimal interest rate risk from signing to delivery--usually about a 45-60 day time period. These institutions were even better off if they used the OTC institutional options market as opposed to selling forward in case of fallout from rate changes or other typical events that happen during the mortgage origination process.
Once upon a time there were hard core guidelines that allowed the market to work exceptionally well as opposed to having these institutions place small individual mortgages with insurance companies, etc. and thus a very liquid market was created....but I digress, to the 80's and early 90's when it truly worked.
The only big scandal in the mortgage securities market in the early 90's (and we are not going to go into the insanity of the REMIC market right now) was a creation by a handful of small originators that created high coupon mortgages and let the borrower live free until they were financed at the current rate. Mortgages 3-4% or above the current coupon are called premiums and they were 99.5% old stock from 1983-84 from people too uninformed to refinance or had not done so for tax write-offs or other reasons unknown. Their prepayment rates were reasonably small enough for them to sell at the premium price they commanded.
The scandal involved selling these newly created high coupon mortgages hoping idiot investors would not check the pool numbers and see they were recent originations. Because if you bought a 12% mortgage at 110 and it paid you back at par in 6 months, you were fucked. The scam was they refied them every few months down 50 basis points until the mortgage was at the current rate. And the person who took out the mortgage was free of payments until the "real" mortgage kicked in. The originators made all their money from the premium. It was called the "Live Free" scam and I wrote the story for Dow Jones 18 years ago. I remember sitting at a Telerate terminal and actually punching in every pool number with a high coupon until I found the originators of that year, made some calls, and broke the story.
As always, grateful for your excellent contributions to this blog, Bruce.
Howard, You say:
Once upon a time there were hard core guidelines that allowed the market to work exceptionally well.
You are so right. What are you an old guy like me?
The pedulum will swing back on this. It swung to a level that nearly killed us (it may yet). now it will swing back. The D.C. lenders will be making 80/20 loans to good borrowers who have jobs and there is a solid appraisal. That will take another year. But when it happens that sucking noise is going to be heard again. And you will get your 25% down in RE.
That sounds like a bad ending. Actually it is not. "We" could just continuing kicking the can down the road and making bad loans. That is the worst ending of all.
Bruce, I totally agree that kicking the can down the road would be the worst thing we could do. This should be sorted out in the next 2 years. The pendulum will swing back, as it always does.
And yeah, I'm an old guy like you that traded the stuff before I went to DJ.
nice thanks
Thanks Bruce.
At the time that the wheels were coming off of FRN/FRE junk loans the FHA was picking up the slack and issuing horrendous loans. I only learned of these from bloggers, yet I did what I could to turn the information into easily readable chunks for my state's reps and senators. All that I got for the effort was the usual, "Thank you for sharing your opinions...." Follow ups had no effect so I dropped it. The Wisconsin senators have no excuse for ignoring what FHA was up to in the much more dangerous lending as they have "full faith and credit". (That was before the goo illegally assumed that condition for FNM/FRE.)
At the time I informed anyone that would bother to listen that all was hopelessly out of control and that the consequences would destroy any silly hopes that they had for their expected ponzi scheme returns from SS and Medicare.
The NY FHLB was a leader in carrying on the scams of Wall Street. The pols ignored all of what has come home to squat on the taxcows.
My only advice to the taxcows is to consider that they have been put on the hook for the most obvious ponzi scheme ever, and have no representation in congreff. Therefore they have zero liability for paying for the hire of credit that they had no control over.
I have had no debt for the past ten years or more. If I have to come up with 240k for a new machine tool, I buy it with savings. If they put me on the hook for paying for housing and everything else I will quit and send all of the employees home. I have had it. I have had it with the folks on ZH that broke themselves and broke the rest of us for playing along with the money for nothing scams.
I am a crackpot because I believe that all of this was planned. For a decade I was dismissed as a negative nabob, and derided for counseling prudence. Every one that I warned is broke. They are not just plain broke, but are severely compromized to the point that they are having a tough time with properly feeding their families. Too bad. I am quite certain that they will go after me for what I have stocked for my careless family.
I know that I am way too morose about the prospects for many of us. I might take a week or two off for a vacation to get a better attitude. I have wasted my gift of life in keeping my nose to the grindstone and am going to reform.
Current Wisconsin senators are a waste of oxygen, but it is getting oh so close to having possibly Johnson and Ryan in there soon. Might turn it from one of the worst represented states to the best?
Tapeworm, Duuude is right.
You are a Capitalist (in the good sense). You put your dollars on the line, and not borrowed them.
In our new economy, we will all get smacked. But, it is guys like Tapeworm who will help us rise from the ashes.
Unless we get civil war or dictatorship. Gold and guns for that.
Tapeworm
Not wasted. You live a life of Honor, a beacon for those you touch who can see.
his statements are simply an ass-covering maneuver in anticipation of the 2014 Congressional hearings on the bankruptcy of the United Sates of America
or not. of course the purpose of "loan mod" is to keep people in their homes and has nothing to do with "debt forgiveness." if you folks would stop larding up on your own retarded brilliance for five seconds you'd realize "hey, these g-guys aren't nearly as useless as i think of every one around me all time." point being what the government fears is something far larger than what some worlthess "bail me out of my own bank before i fire again" so called ceo is dorking over. the government is looking quite rightly at the problem of a couple hundred thousand or more Americans "wandering aimlessly around the land." in Roman times they were called "the Visigoths" and by the time they were done "roaming" the Roman empire ceased to exist. forever.
nice analogy if a little weak on history.
I reckon the citizens of Rome mailed in the keys, the Visigoths moved in and started paying the property taxes, for a while anyway.
Perhaps he meant Vandals?
The Vandals were an East Germanic tribe that entered the late Roman Empire during the 5th century, perhaps best known for their sack of Rome in 455. Although they were not notably more destructive than other invaders of ancient times, Renaissance and Early Modern writers who idealized Rome tended to blame the Vandals for its destruction. This led to the coinage of "vandalism", meaning senseless destruction, particularly the defacing of artworks that were completed with great effort.
http://en.wikipedia.org/wiki/Vandals
doolittlegeorge, before revising Gibbon, you might do well to read it first, or at least the Cliff Notes. For the modern visigoth who roameth too much, there is the homeowner's gun. For the rest, they can live in apartments. Good grief.
I was just reading on Calculated Risk that cash strapped apt complexes aren't evicting non/late paying tenants in some states because of the legal costs. Darn Visigoth squatters...
I was not aware that the Visigoths had their houses foreclosed on.
Can you just see these guys roaming the countryside?
Didn't you know that in middle fifth century Europe adjustable-rate usury to finance Visigothic Mchovels was all the rage as well? But the bankers were rather more reluctant to actually foreclose on said dwellings, what with their occupants being well-armed, bloodthirsty, amoral barbarians. Seems like the roles have reversed since then.
I laughed out loud. Very good my friend.
..
What does that clown do about it? Congress threatened to increase the down payment requirement on FHA to 5%, and that idiot fought it.
No private lender would lend at 3.5% down, but it is 40% of the FHAs business.
If he wants private capital in the market, he needs to set reasonably guidelines so he doesn't crowd out private capital.
What a buffoon.
"An easy way to achieve this is to reduce the geographic lending limits for all the D.C. lenders to where they were in 2007-08, that was about $417k."
No, an easy way would be to Congressionally mandate they require 5%, or even better, 10%, down payments.
Actually, 20% down is what should be required. End of story. Even with the old minimum of 10% and the other 10% covered by PMI, who's going to trust the mortgage insurers? 20% or rent. Simple as that.
prior to GD1, a 50% requirement existed. just b4 GD1 50 became 20 and you saw GD1. Now we went from 20 to 0!!
I'm in escrow now with 10% down on a $643,000 home. I have the money to put up 20% but I like keeping as much cash as possible in my hands and not tied up in the house. Every home I have owned with the exception of my first home (20%) I have put down 10%.
Makes perfect sense for you and every other buyer, assuming financial distress is avoided. Makes absolutely zero sense for the lender, but that's why they are all insolvent....
20% or rent?
That would crash this sucker real fast.
there is little alternative.
is she from Nantucket?
Good. Let's get it over with fast instead of the pain and suffering that is ahead.
You were not emphatic enough:
Damn good, and now.
Yesterday would not be too soon.
My bad...
The question not on everyone's lips.
Where does the FHA get the money to loan?
Oh.
Can't modify the programs any more than modifying the loans! That'd be discriminatory, red-lining, preferential, treating one class of borrowers different than others.....
Yeah, just like the government did with GM and Chrysler and plans to do in the new financial reform bill where the FDIC can treat creditors of the same status in differing manners.
Crony Capitalism Come Alive!
Also referred to as Mercantilism.
Don't want that here now, do we?
Can't do that here now, can we?
Great policies to attract foreign funds.
do you think they increased the limit to 700k because they were soft hearted liberals trying to help people in Cleveland, Miss, buy houses? the 700k increase was to bailout out home builders, banks. And notice when the worst loans full of fraud were issued...2007 and 2008..previously discriminated neighborhoods that were "redlined" don't have people buying houses for 700k...this subsibdy of well off home buyers to support well off realtors, home builders, and banks (their assets are mostly mortgages so house price matters to them greatly.