- Jan 28, 2005
- 2,146
- 26
- 91
Wow, 7.8% of FHA loans were at 90 days late end of 2Q. Will they need bailing out?
Link to Market Ticker article
LINK to WSJ
Link to interesting FHA discussion
The Next Boom: FHA
The WSJ picks up the gist of the problem, but misses badly on the cause:
The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.
The rising losses at the FHA, part of the U.S. Department of Housing and Urban Development, come as the agency has rapidly increased its role in guaranteeing loans in an attempt to stabilize the housing market.
In danger of? It is a mathematical certainty unless changes are made essentially "right here and now."
Rising defaults have eaten through the FHA's cushion. Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, a figure roughly equal to the national average for all loans. That is up from 5.4% a year ago.
So says the WSJ. Oh, by the way, with 2% capital reserves and 7.8% of loans non-current (and beyond cure) the odds of going underwater with that capital cushion are high enough that you better ask for odds if you place a bet they won't - I wouldn't take that bet at less than 10:1 odds, in fact, as it is nearly certain on a mathematical basis (the ratio was cut by more than half in 2008 .vs. 2007, from 6.4% to 3% - what's another 3% place it at? Oops.)
The real problem is as "Do_The_Math" put forward in this post over on the forum, and which I have repeatedly highlighted - excessive leverage and inadequate underwriting in the FHA process:
Lunatic_fringe. Standard FHA DTI is 31/43. It used to be 29/41, but the ratios were expanded in 2005 after the Bush tax cuts. The logic was that the tax cuts allowed borrowers to allocate more of the their gross income toward housing and liabilities. These debt ratios are not cut and dry, and can be exceeded with significant compensating factors unless the borrower has alternative credit.
However, if the lender uses AUS TOTAL Scorecard to analyze credit and income qualifying, the debt ratios can be exceeded. I've seen AUS recommendations in the 40's/50's without compensating factors AND layering of risk. Fortunately, more lenders are implementing underwriting overlays that limit the back end ratio.
Eek. Oh, and let's not forget that instead of a safe and sound 20% down payment FHA permits 3.5% down, and with the $8,000 "home buyer credit" you can use that for the downstroke either in whole or part, so we have a whole lot of "new borrowers" with absolutely no skin in the game.
Of course when you keep adding people to a pool who haven't had time (yet) to default it makes the percentages look better. But this is a shell game - unless their performance is better over time than the remainder of the pool you are poisoning the well with certainty.
Unfortunately the FHA's ramping loan issuance hasn't been to higher-quality borrowers - it has been to people who are getting loans with multiple layers of risk, with the "new home buyer credit" another level of layering up.
The performance of these loans is likely to be horrifying, especially given the flat-to-worsening employment situation. This gambit is yet another instance of expectation of both an imminent turn in housing prices and generalized economic recovery - an outcome that is tenuous at best.
By my analysis this is just another attempt to "reflate" the housing bubble but you can't pump air into a popped balloon. Instead we are setting up yet another government lie factory for a huge explosion with this one threatening to detonate what's left of mortgage finance.
FHA must be reformed and the lie factory shut down here and now. 28/36 DTI (front and back end) ratios must be reinstated and strictly enforced. In addition, down payment requirements must go to 20% - cash - no gimmicks.
This will force prices lower on real estate but it will also stabilize the finance market for new loans. Yes, it will force recognition of the losses already made on the books of banks and other institutions, a lie that these institutions have managed to maintain now for more than two years on the back of bogus accounting changes and willful government complicity.
But that price adjustment will lead to buyers coming into the market with cash down payments of 20%, limited (no more than 5:1) leverage (as a result of the down payment requirement) and debt-to-income levels that are sustainable for the long haul. It will result in default rates on these new loans falling to the 1% range. It will result in a cessation of new homeowners being "trapped" in homes - a side effect of the "extend and pretend" lie that results in ramping unemployment as it precludes a homeowner from selling their home and moving to follow job opportunities (you can't sell a house that's underwater without cash you don't have, especially after you just lost your job!)
We desperately need higher-quality buyers in the market, not lower-quality ones and we must stop trapping people in houses when they lose their jobs, preventing them from following opportunity in the labor market. You cannot stabilize a market or economy with "one breath away from default" buyers on financed terms with no capital cushion - that path, which is what the FHA is doing today, is the worst kind of political BS in that it virtually guarantees a disaster in the immediate future.
Link to Market Ticker article
LINK to WSJ
Link to interesting FHA discussion
The Next Boom: FHA
The WSJ picks up the gist of the problem, but misses badly on the cause:
The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.
The rising losses at the FHA, part of the U.S. Department of Housing and Urban Development, come as the agency has rapidly increased its role in guaranteeing loans in an attempt to stabilize the housing market.
In danger of? It is a mathematical certainty unless changes are made essentially "right here and now."
Rising defaults have eaten through the FHA's cushion. Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, a figure roughly equal to the national average for all loans. That is up from 5.4% a year ago.
So says the WSJ. Oh, by the way, with 2% capital reserves and 7.8% of loans non-current (and beyond cure) the odds of going underwater with that capital cushion are high enough that you better ask for odds if you place a bet they won't - I wouldn't take that bet at less than 10:1 odds, in fact, as it is nearly certain on a mathematical basis (the ratio was cut by more than half in 2008 .vs. 2007, from 6.4% to 3% - what's another 3% place it at? Oops.)
The real problem is as "Do_The_Math" put forward in this post over on the forum, and which I have repeatedly highlighted - excessive leverage and inadequate underwriting in the FHA process:
Lunatic_fringe. Standard FHA DTI is 31/43. It used to be 29/41, but the ratios were expanded in 2005 after the Bush tax cuts. The logic was that the tax cuts allowed borrowers to allocate more of the their gross income toward housing and liabilities. These debt ratios are not cut and dry, and can be exceeded with significant compensating factors unless the borrower has alternative credit.
However, if the lender uses AUS TOTAL Scorecard to analyze credit and income qualifying, the debt ratios can be exceeded. I've seen AUS recommendations in the 40's/50's without compensating factors AND layering of risk. Fortunately, more lenders are implementing underwriting overlays that limit the back end ratio.
Eek. Oh, and let's not forget that instead of a safe and sound 20% down payment FHA permits 3.5% down, and with the $8,000 "home buyer credit" you can use that for the downstroke either in whole or part, so we have a whole lot of "new borrowers" with absolutely no skin in the game.
Of course when you keep adding people to a pool who haven't had time (yet) to default it makes the percentages look better. But this is a shell game - unless their performance is better over time than the remainder of the pool you are poisoning the well with certainty.
Unfortunately the FHA's ramping loan issuance hasn't been to higher-quality borrowers - it has been to people who are getting loans with multiple layers of risk, with the "new home buyer credit" another level of layering up.
The performance of these loans is likely to be horrifying, especially given the flat-to-worsening employment situation. This gambit is yet another instance of expectation of both an imminent turn in housing prices and generalized economic recovery - an outcome that is tenuous at best.
By my analysis this is just another attempt to "reflate" the housing bubble but you can't pump air into a popped balloon. Instead we are setting up yet another government lie factory for a huge explosion with this one threatening to detonate what's left of mortgage finance.
FHA must be reformed and the lie factory shut down here and now. 28/36 DTI (front and back end) ratios must be reinstated and strictly enforced. In addition, down payment requirements must go to 20% - cash - no gimmicks.
This will force prices lower on real estate but it will also stabilize the finance market for new loans. Yes, it will force recognition of the losses already made on the books of banks and other institutions, a lie that these institutions have managed to maintain now for more than two years on the back of bogus accounting changes and willful government complicity.
But that price adjustment will lead to buyers coming into the market with cash down payments of 20%, limited (no more than 5:1) leverage (as a result of the down payment requirement) and debt-to-income levels that are sustainable for the long haul. It will result in default rates on these new loans falling to the 1% range. It will result in a cessation of new homeowners being "trapped" in homes - a side effect of the "extend and pretend" lie that results in ramping unemployment as it precludes a homeowner from selling their home and moving to follow job opportunities (you can't sell a house that's underwater without cash you don't have, especially after you just lost your job!)
We desperately need higher-quality buyers in the market, not lower-quality ones and we must stop trapping people in houses when they lose their jobs, preventing them from following opportunity in the labor market. You cannot stabilize a market or economy with "one breath away from default" buyers on financed terms with no capital cushion - that path, which is what the FHA is doing today, is the worst kind of political BS in that it virtually guarantees a disaster in the immediate future.
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