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  • FHA and Home Occupancy as an Entitlement

    Posted by Carl from Chicago on October 8th, 2010 (All posts by )

    The FHA used to only represent a small portion of the US mortgage market.  FHA buyers were perceived to have poor credit and use this government program (essentially a subsidy) to enable them to purchase a house that they would live in, thus increasing the “social mission” of increased home ownership in the USA.  However, after the meltdown in securitized mortgage lending in 2008, the market for non FHA loans essentially evaporated and the FHA has moved from a small percentage of the mortgage market (maybe 5%) up to as high as 90% in some regions among eligible residences.  There are limits on FHA buyers, mainly that the house / condominium can’t cost more than $369,000 (or $729,750 in some high cost markets like CA and NYC) and that the owner needs to live in the house (not for 2nd homes).

    In Chicago many of the condos are below the threshold where FHA financing makes sense and so the issue of whether or not a particular unit is eligible for FHA financing is becoming more important in the marketplace.  Buildings advertise in large letters if their condominium is eligible for FHA financing (on units that qualify under the cost threshold above, of course).  At some point it is possible that buildings that cannot get FHA approval (they have other criteria regarding reserves, commercial tenants, etc…) would be at a severe loss when trying to sell out for the first time to owners or for existing owners to resell to new buyers.

    There has not been a lot of discussion on whether or not it makes sense for the Federal government to essentially nationalize the mortgage industry, but that is what is occurring today.  FHA loans are now the only loans in town since their low down payments and rock bottom interest rates drive out competitors at their price levels.  And it is only a matter of time before the FHA raises their cost limits which would further their dominance in the market, leaving only the high end for other types of mortgages.

    I also believe that wise developers will tend to “cluster” their pricing right around the FHA limits.  If you have a $450k condo, that is a bad price point if only $384k can be financed, so shrink them down a bit or reduce amenities to hit that price point. As soon as the FHA raises their limits, then the mid-tier condo market will move closer to that pricing point, over time, as developers realize the power of FHA and the limited market for non FHA loans.  This will take a while and be subtle because development is dead now so little is coming onto the market, but I’ll bet you’ll see this in the next wave.

    On a parallel thread, the banks that are attempting to foreclose on individuals who are seriously delinquent in their mortgages have been facing rough times lately.  This article from Fox News describes not only a recent veto of a bill to facilitate electronic notarization of documents but other issues that are slowing or even halting bank foreclosures.  Per the article:

    Three of the nation’s largest mortgage lenders – Ally Financial, JP Morgan Chase and Bank of America – have suspended foreclosures in 23 states after reports revealed that lenders were signing documents without reading them or filed inaccurate paperwork. That has led to several lawmakers and civil rights groups, including the NAACP and the National Council of La Raza, to call for an investigation into the foreclosure process and a suspension of all home foreclosures.

    As the Federal Government nationalizes the mortgage market, you can soon see the writing on the wall that foreclosures will be protested against just as a special interest group would protest any other entitlement change.  Since it is a government program, why can’t they just bend the rules for the poor or a special community, especially one that is politically connected?  While I have seen conflicting estimates of FHA losses and when they will start to need money from the US Treasury to cover the program (they had been self funding all along until now) the dire mortgages from 2007-8 are starting to go sour which will definitely raise loss rates overall for them.

    I’m sure someone thought all this through in conspiracy-land but really the threads are only starting to become evident as the FHA drives out all the competitors with their low rates and low down payments on the one end, with cost levels rising over time which will allow them to control a larger portion of the total market.  Developers (smart ones) will also tend to build units that qualify for FHA loans in the first place.  Then when a foreclosure comes – use protest politics.  And FHA losses become everyone’s responsibility, not the borrowers.

    Now your own home is an entitlement.  You can see where this ends up.

    Cross posted at LITGM

     

    8 Responses to “FHA and Home Occupancy as an Entitlement”

    1. Michael Kennedy Says:

      I had competing offers of financing for a home I bought in July. Of course, I had a 20% down payment but the FHA story is just another attempt to reflate the bubble with low down payment deals. I think the market for homes has not hit bottom, at least in California, and seriously considered renting for another year. This is one more disaster waiting to happen. I just can’t believe that ceiling for FHA in California. It’s crazy.

    2. Robert Schwartz Says:

      Carl: What we are now experiencing in the mortgage market is not new, nor is it the result of nefarious actions.

      It is just another chapter in the long and sad history of Federal involvement in the business of housing finance. This is an involvement that began with Herbert Hoover in the 1920s! (Although FDR greatly expanded it in the New Deal) There have been repeated crises and breakdowns.

      “Obsessive Housing Disorder” by Steven Malanga
      http://www.city-journal.org/2009/19_2_homeownership.html

      The Federal agencies are 100% of the mortgage market right now, but that is not far from the 90% market share they held in the 1990s. see chart 9 of:

      “Here’s Why House Prices Will Now Drop Another 20%” by Gary Shilling
      http://www.businessinsider.com/gary-shilling-house-prices

      This is why the real scandal of the Dodd-Frank bill s that it completely ignored the role of the Federal agencies. Without a real restructuring of the whole mortgage finance system. The 2008 crisis is just a prelude of the next one.

    3. Robert Schwartz Says:

      A note on the so called documentation crisis in foreclosed home mortgage loans. No one has suggested that the borrowers did not borrow the money and did not fail to make timely payment. Paperwork problems are just that. The occupants of the houses encumbered by defaulted mortgages need to move out and the houses need to be sold to new owners who can afford them. Until that happens, the housing market cannot begin to recover

      “The Politics of Foreclosure: Washington’s latest obstacle to a housing market recovery.”
      http://online.wsj.com/article/SB10001424052748704696304575538440995389092.html

    4. Carl from Chicago Says:

      I do think that the act of the Federal agencies buying the mortgages after they have been securitized is different than the act of initiating all the mortgages in the first place with the FHA. I also think that until recently the FHA did not have such a distorting factor on the overall market as we are starting to see here in the Chicago condo market. Also until recently they did not acknowledge the huge loses that Fannie and Freddie were taking on mortgages and also the fact that the FHA is now going to be underwater. Finally the fact that they are pushing down 30 year rates to super low levels to refloat the economy and now they are halting foreclosures.

      Agreed that TECHNICALLY all these factors were at play to some level but now they are gigantic and work together in a giant wave.

      In my opinion, at least.

    5. Darleen Says:

      FHA buyers were perceived to have poor credit

      Perceived by whom?

      In the 1970′s I worked in load servicing at American Savings & Loan, Whittier, California. The “perception” then was the FHA loans we held (along with VA loans) was that they were usually taken out by modest-income, young families as first time home owners, just as VA loans worked (my parents bought their first home VA in 1954 – young marrieds with an infant). Their credit worthiness wasn’t much different from many of the conventional or high rollers. (indeed, there was one celebrity whose loan we held that was notorious for going into default and needing a personal visit from a loan officer to get him to make payments).

      One of my daughters bought her first place last year (short sale condo) through FHA because it was a good deal, and her FICO score is 760.

      The foreclosure mess is mindboggling, not the least of which is the people caught up in it cannot be stereotyped. Some borrowers lied on their loan apps and were never able to make payments. Some borrowers were flippers, and got caught without a chair when the music stopped. Some borrowers did everything right, could afford their payments, but got caught in the economic downturn and lost their jobs or businesses. Some borrowers are current, can afford their payments but have walked away or seriously consider walking away because their are 30-50% underwater and banks refuse to work to modify principal because the bank actually makes more money from the foreclosure because they get paid the balance from insurance. In this last case it dawns on the borrower that they are screwed whether they stay or leave.

      A foreclosure moritorium is not a good answer but then neither is banks refusing to negotiate in good faith with borrowers in order to keep more foreclosures off the market (and further depressing home values).

    6. Darleen Says:

      typo

      load servicing = loan servicing

      [facepalm]

    7. tomw Says:

      Ummh, what do I do? I got downsized and turned out to pasture over 10 years ago, and had enough saved to pay off my mortgage, and, as I no longer could use the deduction to lower my tax/interest effective rate, I paid off the note.
      Now I own a house, free and clear, but the market value is less than I paid 18 years ago. What is Uncle Sugar going to do for me? I worked, I saved, I paid my bills, and have exactly what to show? A place to live, and that’s something.
      All the people Darleen noted who quit paying are in effect letting everyone else take up the slack. The bank may get insurance money, but it has to come from somewhere, perhaps driving the insurer to insolvency. The homes will not quickly be sold to anyone, and depress the resale market because of the glut. There is a lot of pain left in this mortgage mess yet to be felt.
      It seems to me that everyone is hurt by the avarice and greed of a few money ‘managers’ who ‘knew’ default rates could never reach these levels… The ‘geniuses’ at Fan and Fred should have their bonus payments clawed back, as they were imaginary profits, and manipulated figures. Ditto the Wall Street calcs. Won’t call them quants, because that would imply measurability, and their product was immeasurably lacking.
      tomw

    8. Brett Bim Says:

      “No one has suggested that the borrowers did not borrow the money and did not fail to make timely payment. Paperwork problems are just that.”

      That is false. There are many people who are suggesting that a major fraud is being covered up by the banks by voluntarily halting foreclosure proceedings. If this was a mere paperwork issue, I find it hard to believe that BofA, JPMC and Ally would volunteer to suspend foreclosures if they weren’t attempting to hide complicity in the mess. While every halted foreclosure isn’t fraud related, they can’t all be “paperwork problems.” There are known instances of fraud with many of these foreclosures including people who were foreclosed on when they didn’t even have a mortgage. Clearly, it’s not just paperwork problems.

      Yes, certainly some people bought far more house than they can afford and once due process has been worked out, they should be foreclosed on. But the banks are equally complicit in many cases. 20 years ago, if my parents had walked into a bank making $40K and asked for a $160K mortgage, they would have been politely escorted out the door. But in the mortgage bubble we’ve seen, that was common.

      Should everyone have the right to own a home? No. But what is going on right now has little to do with entitlements and more to do with the banks not wanting a good deal of fraud to be publicly exposed.

      Washington Post on the foreclosures

      Summary of the foreclosure debacle