San Diego Housing Bubble News and Analysis

FHA still does zero down, and with increased loan limits you should start seeing a lot of California business going zero down FHA soon enough. And it will cost the taxpayer plenty.

See http://mpra.ub.uni-muenchen.de/5370/

for an analysis of how badly these things default.

Moreover, there's going to be a huge refi boom, as lenders shift their high risk loans to Fannie, Freddie, and FHA loans. The only sticking points are the documentation and the DTI requirements, but those can always be eased.

The only questions in my mind are (1) How will the debt markets respond and (2) do Fannie and Freddie shareholders get anything once those two orginanizations become insolvent and ultimately nationalized?

Hmmm ... it does indeed look like there is a way to get a zero-down loan through FHA:

"On Sept. 28, the Housing and Urban Development issued its final rule regarding the use of seller-funded down payment assistance programs. This ruling stated that, effective Oct. 31, HUD would prohibit the use of down payment assistance programs that, in whole or in part, consists of funds provided by any of the following parties before, during or after closing of the property sale: the seller or any other person or entity that financially benefits from the transaction; any third party or entity that is reimbursed directly or indirectly by the seller; or any other person or entity that financially benefits from the transaction.

At that point in time, in order for a homebuyer to use a gift that was derived from the seller, they must have entered into a contract to sell and the contract must have been fully executed and the offer accepted before that date. The Nehemiah Program was excluded from the Oct. 31 date because of a settlement agreement entered into between the Nehemiah and HUD in April 1998. The Nehemiah Program was permitted to go until March 31.

As a result of the ruling making these assistance programs void and leaving homebuyers without down payment assistance, organizations such as AmeriDream and Nehemiah immediately filed lawsuits in Federal Court to challenge the merits of HUD's rule and seek an injunction blocking the implementation of this rule. On Nov. 1, FHA sent notification that the U.S. District Court now has forbidden FHA to implement the discontinuance of down payment assistance programs. In other words, until further notice, down payment assistance is alive and well."

http://www.newarkadvocate.com/apps/pbcs....

Thank God the government is still guaranteeing zero-down loans.

My current position is that raising conforming limits for Fannie and Freddie is ultimately a good thing.

Here's what will happen. Bond traders have no interest in holding MBS that mix high-risk jumbo loans with regular conforming loans. Freddie Mac CEO has already stated explicitly that they are going to isolate new loans in a separate pool. Fannie will have to do the same.

In 2005-2007, despite generous housing-to-income requirements of private lenders, most jumbos were stated income. How many people can really qualify for a new conforming jumbo? (Best case scenario, you'll need 180K documented income to get a median house in 4S Ranch) My guess is, a minority. That minority will benefit from lower rates on jumbos. (Still, jumbo rates won't come down all the way to conforming, some rate differential will remain) As an unintended consequence, private-label jumbos will suddenly become the 2008 version of subprime/Alt-A - all safe customers are gone to GSEs, the remaining ones are no good, either interest rates go up or the entire market disappears.

Net effect - fewer jumbos given to fewer customers, fewer houses sold in high-end areas.

Make no mistakes about it, there will be more sales activity due to this stimulus whether we are talking FHA or the conforming limits. To be sure, to me this simply represents a further burden to the taxpayers.... it is just delaying the inevitable....we will pay though, it doesn't matter how prudent we are.

SD Realtor

Make no mistakes about it, there will be more sales activity due to this stimulus whether we are talking FHA or the conforming limits

A question ...

What would be a typical interest rate on a $300,000 30-year fixed loan with housing-to-income ratio of 40%, or "stated income"? Compared with "conforming" (say, 25% housing-to-income)?

Let's assume FICO 750 and 80% loan-to-value.

I'm not too concerned about raising the conforming limit for Fannie and Freddie. These are still private enterprises, and they have pretty good incentives not to guarantee junk loans. They're trying to make a buck first, and appease the politicians second. Sure, if they fail, we're on the hook for their losses, but I bet they won't fail.

However, I'm very concerned about the new FHA limits and the entire down-payment assistance issue. The FHA is an arm of the government, and they could potentially underwrite or guarantee a lot of junk loans. If they take big losses, they'll just get money allocated in next year's budget to cover them (like the Post Office, for instance). It wouldn't be even called a bailout. It would simply be the government (us) paying the bill for some government expense, like the Iraq war. I bet there wouldn't even be an uproar over it (there would certainly be one if Fannie or Freddie went under and got bailed out).

Truth to be said, the FHA has done a pretty good job historically, as it's been mostly in the black over the years. But that was partly because they were dealing with small loans. Can they correctly price risk for jumbos? I doubt they can, and I'm sure there will be great political pressure for them to be lax. That's why it's the FHA that worries me, not the GSEs.

I'm not too concerned about raising the conforming limit for Fannie and Freddie. These are still private enterprises, and they have pretty good incentives not to guarantee junk loans. They're trying to make a buck first, and appease the politicians second. Sure, if they fail, we're on the hook for their losses, but I bet they won't fail.

I bet you're wrong. According to their latest 10-Q (filed last November), Fannie has guaranteed $2 trillion in mortgages and owns $700 billion. All this on $44 billion in capital. Does this look like a sound balance sheet to you?

The only incentive the Fannie and Freddie CEOs have are to make short-term results look good through the fees generated by mortgage originations. They have virtually no incentive to look at the long-term likelihood of payback on these loans as that won't affect their bonuses for the next quarter.

My guess is that if the Fannie and Freddie mortgage portfolios were marked to market, they would both be insolvent.

Here's a link to Fannie's latest 10-Q.

http://www.sec.gov/Archives/edgar/data/3...

Search for "MBS held by third parties" on that page to see how bad it is. In that little section you can see how enormous their mortgage book of business is and how little capital they have. These guys are goners without additional captial infusions.

I'd give you a link to Freddie Mac's latest quarterly filing, but I can't find any:

http://www.sec.gov/cgi-bin/browse-edgar?...

Who knows how bad their situation is.

Fannie and Freddie will not fail. They are too big to fail, and everyone knows it.

Their loans may turn out to to be worth hundreds of billions less than what was loaned, but then the govt will step in to save them. Over time, as these two GSEs loaned more and more in overpriced markets, backed by private capital that is a minuscule fraction of the loans, they went from being arguably partly private organizations to almost totally government organizations. Now the private capital they have can absorb only a tiny hiccup in the hyper-inflated bubble market, and the private label is a charade.

Patient renter in OC

I fully understand why people worry about Fannie and Freddie. I just don't understand why they don't worry about FHA. FHA will take lower FICO scores, higher debt-to-income ratios, lower down payments, and unlike Fannie and Freddie, they have no capital at all between them and the taxpayer.