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FHA - The Other Troubled D.C. Lender
FHA Director David Stevens came out last week with a statement
that their 2% minimum capital rule will be broached this fall. Mr.
Stevens swore that this was not going to be a problem and no federal
bailout was going to be required. He came forward with a list of
things to address the problem. As near as I could tell none of these
changes will have a significant impact on the results. The proposed
measures will not be implemented until after 1/1/2010. By then it will
be too late. In my view FHA will most likely require a federal support
package sometime in the 1st quarter of 2010.
FHA is on a tear to
provide new mortgages. One needs only to watch cable TV and see their
endless ads to confirm that. FHA makes high LTV loans. They lend as
much as 96.5% of a purchase price. This coupled with the first time
buyer credit of $8,000 makes them a provider of 100% financing. The
history of this type of lending shows very high default rates in the
first eighteen months of a loan. Between now and January their capital
cushion will be eroded and we will have another Fannie and Freddie
story to deal with.
FHA is not a public company, it is owned by
Congress. They do not publish the wealth of information that F/F does.
It is therefore difficult to determine just how sick they are.
Rummaging through their web site I did come across something that I
thought was interesting. FHA sets ceilings on its credit extensions
based on geography. This make sense as RE values vary across the
country.
There are some predictable results and a few surprises. The major East/West Coast cities have the highest limits:
But if you live in one of the Nation’s other Cities you are not so lucky:
And if one lives in some not so expense (but still very nice) parts of the country you have been red lined by the Feds:
One
has to wonder if RE prices drove these limits or if these limits drove
RE prices. An example: The FHA has set very high loan limits for a
number of major ski resorts. It is certain that the availability of
cheap FHA loans with 96.5% LTV has been a boon to the development of
these areas. I have to wonder as to the social implications of this.
These are Federal dollars being spent in support of a rich man’s sport
in rich man’s Counties.
Other FHA factoids:
-The
highest advance rate for FHA is in Maui, Hawaii. There you can borrow
up to $790,000. While I understand that RE is pricey in this beautiful
spot I am not convinced that Uncle Sam should be supporting those high
prices.
-In San Juan, Vermont the limit is $271,050, In San Juan, Puerto Rico the limit is more than double that; $606,500.
-In
Saipan you can get an FHA mortgage for up to $613,000. In Guam the
limit is $651,000. In St. John, Virgin Islands you can get a 96.5%
mortgage for up to $623,000.
-In three important counties in S. Florida the limits are as follows:
Miami-Dade – $423,750
Palm Beach- $423,750
Collier- $531,250
By way of comparison the following twenty-seven counties in Puerto Rico have FHA limits of $606,250. Go figure that one out.
Guaynabo,
Gurabo, Hatillo, Humacao, Juncos, Florida, Tao Alta, Tao Baja, Trujillo
Alo, Vega Baja, Vega Ala, Yabucoa, Yauco, Loiza, Maniti, Maunabo,
Morivis, Naguabo, Naranjito, Orocovis, Quebradillas, Rio Grand, San
Juan and San Lorenzo.
-Ann Arbor Michigan is a nice
place. The FHA limit there is $345,000. It would be an interesting
experiment to increase this limit to $700,000 and monitor what happens
over a ten-year period. My guess is that as a direct consequence Ann
Arbor would grow, its citizens would prosper, the local economy would
improve, tax receipts for the community would increase and population
would expand. It worked pretty well at the Ski resorts in Colorado; it
probably would be as effective in Ann Arbor. I don’t think you need a
mountain to get a high limit, but a few friends back at the FHA
wouldn’t hurt.
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Anon 75209
Thank you for your comments. It is clear from the use of the word "we" that you are in insider at FHA. The fact you provide detailed information confirms that as well. I, and the sponsors of this site want you to participate in this discussion. Your insight provides clarity, it corrects the facts. However you are playing on the edge with this. You can't speak for the FHA and remain ANON. That is not fair. I stick my neck out on this stuff, you need to do the same.
For the record I do not agree with the FHA standards you describe. ANYONE who borrows money and ends up spending 45% of their income on housing is going to run into trouble. A "good" mortgage loan used to be 25%. Then it went to 30%, when it got to 35% things were a bubble. When it exceeded that we had a collapse. My guess is that FHA will suffer massive losses making loans to folks where the fixed charges are equal to 45%. Keep in mind that the FDIC guideline on this is now 31%.
If you would like to talk off the grid let me know. I don't bite.
bkrasting@gmail.com
The underwriting standards are still way too loose and the down payment requirement is asking for the same trouble that got us here in the first place. Taking into account the up to $8k tax credit, most purchasers have zero skin in the game.
the FHA's recently released report shows a delinq/f'closure rate of >22%.
FHA will implode. the only question is how great will the implosion be.
Bruce,
You wrote a short piece in the beginning of the month regarding the current tri-state housing climate. You mentioned that the only lender out there was Fannie Mae ($417k mortgage limit).
Any idea why the Fannie limit is $417k and FHA is $730k? Same geo region, same demographics....
I think the limits are the same. I live in Northern Westchester. The limit here is 417k. In other parts of the county they are different. A few miles north of me the limit is $350k and another county up it is $217,050.
There is logic to this and there is a problem with this. I think a flat limit should be considered. There should be no subsidy for ski resorts or island paradises. I don't think there should be a greater limit for D.C than Omaha. Why should the taxpayers in Nebraska or Texas support that? That is what we have a private sector financial system for.
About 10,000 RE agents will hate that recomendation. But that speaks for itself.
Though FHA limits are higher in certain areas and down payment is only 3.5% vs a conventional 20% down on a purchase; to get approved for an FHA loan you must still be able to afford it.
All FHA loans are full doc, meaning we need to verify your income and it must be from acceptable sources
Total monthly debts cannot exceed 45% of the monthly verifiable income
There must be no derog credit in the last 2 yrs, if so, you may be declined.
We pull credit on the non purchasing spouse, so spouses bad credit or outstanding obligations cannot be hidden
Your property taxes and homeowners insurance must be included in your monthly payment, impounded.
Owner occupied residences
FHA has an agreesive Property Flip rule
So, on a $700,000 purchase, you're monthly payment with a rate of 5.5% = $3,902.53 a month PLUS $83 for Insurance; PLUS $729 for prop taxes; PLUS $315 for mortgage insurance = $5,029.53 a month.
No other debts your income would need to be $11,200 a mon
The buyer would have to be financially strong to qualify for a max FHA loan in a High Cost Area
To a degree, it is understandable that you would make large loans in areas like Teton county. High priced markets struggle to get enough workers to wash dishes ect... because of housing costs. Aspen has cheap housing that you can buy from the city but can never sell for capital gain.
So your average 28 yr old local with a professional job might need some form of help getting a mortgage. But in the midst of a second home boom the taxpayer is still on the hook when this goes south. If this story hits larger media streams the ski resort stuff is going to be a killer.
The limits for Salt Lake were crazy. Almost no one lives in Alta. They live in Salt lake and commute. Over $700K for Salt Lake? That's nuts! I don't know who lobbied for that one but they need to be called to the mat. Salt Lake is not and was never Aspen or Jackson Hole when it comes to housing prices. Somewhere there is a Utah congressional member meddling for that $700K+ mortgage limit.
The mushroom cloud over the USA already happened. It's just that no one noticed. It is the gentle and orderly decline that we are now in thanks to Mr. Keynes and Mr. Bernanke. They've done a fine job for 7 months, but I fear it will get a little more slippery, a little more disorderly soon.
With 50% of gov't debt being subscribed by the gov't (Fed same thing really) and the dollar straining to maintain face, this sucka's going down.
If debt won't fail, then the currency will. If gov't props everything, then nothing will stand out. Economics is about differentials. If nothing fails, nothing succeeds. And if nothing succeeds then we're moving into a vortex of grey and gruel. This country will have a scintilla slice of huge money aristocracy, and huge undermass of impoverished, starving, possession-less people.
Welcome to the aftermath of the plunderdome.
A little patch here...a little patch there..kinda like Windows. All those patches help keep the machine running. Every little bit helps.
"One has to wonder if RE prices drove these limits or if these limits drove RE prices."
One will wonder for only a short time. In this credit based economy income, interest rates, and LTV set the loan amount and the prices followed. Abandonment of the traditional 80% LTV and the historically low interest rates were used to inflate this bubble.
The income carpet is being pulled out from under the feet of many people while TPTB struggle to maintain asset prices until all the plebes savings are depleted. At that time asset prices will be allowed to crash and TPTB will swoop in with all that nice "capital" courtesy of you and I via the FED/USG and sweep up all the marbles. This tragedy was written long ago and has been played out many times before.
Clinton asked Cuomo to lower the standards on lending...don't worry, Freddy is gurantee! Ninja loans for all Americans...
Govt involvement guarentees pricing distortions. FHA was and continues to be a bad idea and its implosion (and tax payer rescue) should show this. FHA will need a cash infusion before the end of the year IMO.
FHA activity has ballooned, default rate is rising and the tax payer is on the hook.
FHA involvement was merely another attempt to kick the can down the road further. It's become a dumping ground for toxic debris by virtue of the fact that ultimately it has unlimited (tax payer) funding courtesy of Congress.
Thomas Sowell's book 'The Housing Boom and Bust' is a good read on why housing on the coasts costs more than in the middle of the country. The FHA used to lose out on business because its lending caps were too low for high priced areas of the country and because those loans took longer to close. Relaxed underwriting standards in areas that need to correct, increased haste, a renewed institutional imperative from the executive branch, and the fact that many shady, former subprime lenders have shifted their business to FHA products does not bode well for the FHA.
I love repeating myself on this one....the FHA will implode.
I saw the article when it broke last week and I literally broke out loud laughing (I swear I did) when David Stevens said that taxpayer money would not be needed.
The only way that statement will be true is if JPM/GS bookrun a massive FHA IPO to lure the remaining equity suckers into the "investment of a lifetime".
residential prices (real)
http://www.investmenttools.com/futures/metals/welcome_to_the_page_about_...
about half way down an h&s pattern. going to 100 ozs? probably.
First off. I have no tears for this outfit. They managed to spam the Cable while trying to look like an actual news media.
Second off, Im soo sick and tired of hearing about jumbo this jumbo that. I live in a home that is 27K paid off free and clear. That is 27 THOUSAND dollars and 150 dollars each year for property taxes; half of which goes to the school. That was ten years ago.
Now if I wanted to buy something, I would want to sell this place first and they say it's 70K.
Im making damn sure whereever we move to in the future has property taxes less than 400 dollars. That means, NO City, NO Town, NO county seat NO nothing. Just out away from it all on the edge of civilization. No beaches neither.
I would like to see them try to work our numbers very small at rates so low that they CANNOT afford to loan ME money to buy a small place somewhere.
Nah. I would just wait it out and buy cash when the implosion is finished.
why not wear a hair shirt, raise chickens, and smoke dope. Your thrift borders upon a 3rd world mentality. Let the planes fall out of the sky, defend ourselves with spears and cavalry, make eating plates from local clay.
1st world presumes SOME greed. Make the world a much better place via service or good for a price. Profit. Live better, or even live well.
Survival in a 27K house is just slacker material. Have some self respect. Pull up the bootstraps. And even if it's only cash on the barrel, zero debt for you, you need an upgrade urgently.
But you can take a boy outta the sticks, but not the sticks outta the boy.
Fill us in on the chicken shack you crow out of goober.
You sure seem willing to crap on anyone's head you perceive to be beneath you, but yet fail to provide how many Bentleys you've been drivin' lately.
More back door support for the insiders to prop up their RE. Corpporate centers and vacation homes of all the financial buddies get the treatment. Let's not forget about protecting our DC homes. Oh and, they need to protect Jackson Hole because its such a great place to be once a year. As I posted before, in a keyensian system, all you need to do is follow the flow of the blow to find the corruption.
Some of your rant is reasonable and some is based on lack of knowledge on the issue.
How about you dig around a little more and find out why some places in the country have higher maximum loan amounts than others. It's not that hard to find. Instead of "wondering", why don't you crunch some numbers and look at historic data. Doing anything else is just lazy and brings nothing to the table.
You think this is a rant? Stay tuned when I get going. This is me being nice. I am not wondering anything. I put the facts in front of you. You think it is ok to lend more money in Puerto Rico that Florida? You think that big loan limits for high end RE in ski centers is fair to the average taxpayer? You think the US governmnent should be providing low interest mortgages in the Saipan or Guam? We have limited resources, we need everything we have to deal with the problems at hand. Subsidizing ski resorts is just bad policy. That is why there is a private sector.
Me thinks this is just the indolent kettle calling the lazy pot an inert cooking utensil.
See ya at the fight club asshole!
This article discusses what is effectively cash out FHA loans. Example given is $375K house, 3.5% down, $410K loan -- $45K left over for "repairs". Since the 203(k) is presumably as well run as anything at the FHA, this shouldn't create any problems.
http://www.chicagotribune.com/classified/realestate/chi-restate-foreclos...
you need to take it one step further.. the salariers at those places drive the prices first.. then the gov has to back the FHA in select areas.. near Philly the main line counties are way higher capped than the junk towns..
but yes, now with the downturn, will the FHA caps go down? they had to work hard to bring them up to battle the widespread ARMs.. so dont attack them without all the facts on the table.. the ARMs were the main fuel.. FHA had no part from 2003-2006 before they were allowd to move up their caps
These limits were only raised this high (above around $280k) as part of the various stimulus packages passed over the last two years (first in 2008), so you can't blame them for the increase in prices across the country. Even the Fannie/Freddie conforming limits were not raised above 417k until 2008, after the bubble had begun to burst.
All of the prices were driven up by cheap non-agency loans; the FHA/F/F moves to increase limits were done to prevent them from crashing back down when the non-agency market evaporated.
Not that the government is innocent in the housing bubble. They encouraged the non-agency/alt-a/subprime business that fueled it. They also have driven up prices of homes since income tax was first collected with the mortgage tax deduction.
I love your work Bruce.
However, I'm not exactly sure what you were shooting for here.
If you were trying to point out just how bad the policies are at the FHA than I would consider it a waste of your talent.
Look at just about anything the Federal Government does. One disaster after another. Even FNM/FRE were quasi Federal/Private. Does anyone really think the FHA is in some pristine condition and in the practice of saving money and acting responsibly?
I think the main point with regard to FHA is that it is the major reason there is any activity going on in housing right now, accounting for something like 35-40% of new mortgage loans on taxpayer-backed terms no private lender would even consider. Combined with the $8000 first time homebuyer credit (sure to be extended and/or enhanced past its Nov 30 deadline) it is the housing counterpart to Cash for Clunkers.
When CNBC and the MSM breathlessly report new and existing home sales numbers they never mention how many of these sales are taxpayer subsidized.
Ann Arbor Mi has fallen more than 30% on the mid to low end and it is a huge University town. The condo market is still in freefall due to overbuilding. My sister is a neuroscientist at UM and is a jumbo owner out of town on acreage. I was looking to move there in 2005 and have still considered it an option. In 2005, what was $220K is now about $150K in the best part of W-NW Ann Arbor with sweet established neighborhoods--area code 48103. The jumbos are in another area completely and the sweet spot of town of older large homes and inventories remain high. Furthermore, as of April, 700 foreclosures that were being held back were unleashed on the town, cratering it further. I actually went there in late March this year and looked at a foreclosure listed at $99,000 in a great part of town (1700 Sq ft) and there were no bidders, including me. I would add that the property taxes there are off the charts. That's my 2 cents on a great town that got way bubblicious. Michigan property taxes are very prohibitive--particularly Ann Arbor. Oh, and yes, the FHA is in trouble.
As former MichiGander who headed West must observe
conditions not unlike dry hot tinder box in an
ammunition dump, just waiting for that innocent spark
that will set the whole debt explosion inferno off
into massive life and market-changing defaults. What
happens when trace and commerce default to a stop
because there is no cash or credit at the ATM or on
the internet? Barter, PayPal, Highway Robbery?
A2 certainly not the exception that proves the theory
Academia, Real Estate, GE and GS immune to default
deflation we have not lived for two generations...
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3251493