FHA loans to blame for foreclosures

[Jazzman]

CoreLogic says a significant factor causing recent home loans to slide under water has been the availability of government-insured mortgages that require only a small down payment.

“Low down payment lending in a weak housing market and weak economy begs the question whether we are setting up the FHA to have a multitude of failures down the line.”

As of December 2011, the latest figures available, 31 percent of the U.S. home loans that were in negative equity – in which the outstanding loan balance exceeds the value of the home – were FHA-insured mortgages, according to CoreLogic.

http://www.reuters.com/article/2012/04/26/us-usa-housing-negative-idUSBRE83P12E20120426

Don’t say we told you so!

[carlsbadworker]

The question is do they default with negative equity? Some investor groups (such as Bruce Norris) claims there is no significance in the level of default.

[sdsurfer]

Personally, I would never lend to anyone that only had 3.5% to put down. I think it goes without saying that with less skin in the game people are more likely to walk.

However, I think the whole point is to have a loan product that is available to those with a minimal down payment so that we can work towards getting the person that is not paying out of the home and someone that will or might pay their mortgage in. Of course there is a higher risk than someone with 10 or 20% down. It would be ideal if everyone could go conventional (they would also get a better rate!), but the pool of people that can and will in this market is not equal to the number of homes available. I would not blame FHA for providing “an” option even though we all know it’s not the best option.

The alternative would be to tell everyone they need to put more money down, since they dont have it they would not be buying. The prices would go down which would be good for those who have not bought, but would be detrimental to the responsible people in that neighborhood that put more money down and have been paying their mortgage.

There will always be responsible people that follow through with what they say they will and those who do not.

[bearishgurl]

For the life of me, I don’t understand why FHA’s lending limit is higher than the FF conforming limit of $417K!

The FHA was put in place in 1934 specifically to aid FT homebuyers, including low and moderate-income households to offer 96.5% financing on 1-4 units (where the buyer is in residence) to give them a “leg up” into homeownership.

Nka “FHA 203b,” this MIP program was NEVER intended for move-up/luxury purchases or investment properties but that is what it is typically used for in SD County, what with a current $729,750 loan limit! Even though few applicants can likely qualify to borrow this amount, this is way too much money to loan someone who puts only 3.5% to 5% down, IMO.

The FHA loan limit in SD County should currently be set at $300K. This would allow for an approximate $312K purchase at 96.5% financing. THIS is the type of property the FHA was put in place to finance!! And prospective owner occupants who are shopping at this price point or below are the exact audience the program was put in place to serve.

Slightly OT: Ditto for VA loans. The VA loan limit should be lowered to $417K. The current $477K limit is asking for big trouble, due to the program having zero down (subject to qualifying) for up to $477K. The vast majority of military spouses stationed in SD (male or female) are very young, have little to no college under their belts, and are employed only part-time or unemployed. In addition, the typical active duty military family is subject to COS orders as little as every 24 months.

I think the VA limit should also be $417K for retired military, assuming they still have the benefit (if they used it at one time, it has been reinstated). More than half of military retirees live on their pensions plus “side jobs” or PT work. These are the ones who are native to the area and/or still have family here or purchased a family home long ago in SD, rented it out intermittently throughout their career and never took cash out or sold it. The majority of longtime spouses of retired personnel (if they still have one) never worked or only worked part-time. Most of the newly retired personnel who can’t find good jobs immediately after retirement in SD choose to have the military move their personal effects free back to the area where they first enlisted or any other place in the US where housing costs much less than here. The typical military family in SD lives in military housing complex(es) (which includes all utils but cable/cell phone paid) the entire time of their occupancy but has little to nothing saved upon retirement from the military. They have 30 days from the date of their retirement to vacate their military housing quarters or are cut off from their (now extremely generous) housing allowances within 30 days.

These families have no business borrowing $477K … or $417K for that matter.

This is coming from a person who has lived around a LOT of retired military for decades.

The reason why there have always been a lot of HUD/VA repos (yes, even when the limits were under $100K) is because of all of the above.

[sdsurfer]

[quote=bearishgurl]For the life of me, I don’t understand why FHA’s lending limit is higher than the FF conforming limit of $417K!

The FHA was put in place in 1934 specifically to aid FT homebuyers, including low and moderate-income households to offer 96.5% financing on 1-4 units (where the buyer is in residence) to give them a “leg up” into homeownership.

Nka “FHA 203b,” this MIP program was NEVER intended for move-up/luxury purchases or investment properties but that is what it is typically used for in SD County, what with a current $729,750 loan limit! Even though few applicants can likely qualify to borrow this amount, this is way too much money to loan someone who puts only 3.5% to 5% down, IMO.

The FHA loan limit in SD County should currently be set at $300K. This would allow for an approximate $312K purchase at 96.5% financing. THIS is the type of property the FHA was put in place to finance!! And prospective owner occupants who are shopping at this price point or below are the exact audience the program was put in place to serve.

Slightly OT: Ditto for VA loans. The VA loan limit should be lowered to $417K. The current $477K limit is asking for big trouble, due to the program having zero down (subject to qualifying) for up to $477K. The vast majority of military spouses stationed in SD (male or female) are very young, have little to no college under their belts, and are employed only part-time or unemployed. In addition, the typical active duty military family is subject to COS orders as little as every 24 months.

I think the VA limit should also be $417K for retired military, assuming they still have the benefit (if they used it at one time, it has been reinstated). More than half of military retirees live on their pensions plus “side jobs” or PT work. These are the ones who are native to the area and/or still have family here or purchased a family home long ago in SD, rented it out intermittently throughout their career and never took cash out or sold it. The majority of longtime spouses of retired personnel (if they still have one) never worked or only worked part-time. Most of the newly retired personnel who can’t find good jobs immediately after retirement in SD choose to have the military move their personal effects free back to the area where they first enlisted or any other place in the US where housing costs much less than here. The typical military family in SD lives in military housing complex(es) (which includes all utils but cable/cell phone paid) the entire time of their occupancy but has little to nothing saved upon retirement from the military. They have 30 days from the date of their retirement to vacate their military housing quarters or are cut off from their (now extremely generous) housing allowances within 30 days.

These families have no business borrowing $477K … or $417K for that matter.

This is coming from a person who has lived around a LOT of retired military for decades.

The reason why there have always been a lot of HUD/VA repos (yes, even when the limits were under $100K) is because of all of the above.[/quote]

Great post elaborating on that. Agree 100% that the limits should be as low as reasonably possible. People can live in a condo or attached home if they do not have the down payment for a detached or choose to live in a more expensive area.

[Jazzman]

[quote=carlsbadworker]The question is do they default with negative equity? Some investor groups (such as Bruce Norris) claims there is no significance in the level of default.[/quote]

It is a leading cause of foreclosure. Mr Norris is in the hard money lending game.

[desmond]

Yowza, Yowza, this just in Iceberg sinks Titanic…………

[CA renter]

From November 2008:

“As if they haven’t done enough damage. Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.

You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country’s swooning economy.”

“…More Bad Debt
As a result, the nation could soon suffer a fresh wave of defaults and foreclosures, with Washington obliged to respond with yet another gargantuan bailout. Inside Mortgage Finance, a research and newsletter firm in Bethesda, Md., estimates that over the next five years fresh loans backed by the FHA that go sour will cost taxpayers $100 billion or more. That’s on top of the $700 billion financial-system rescue Congress has already approved. Gary E. Lacefield, a former federal mortgage investigator who now runs Risk Mitigation Group, a consultancy in Arlington, Tex., predicts: “Within the next 12 to 18 months, there is going to be FHA-insurance Armageddon.”‘

http://www.businessweek.com/magazine/content/08_48/b4110036448352.htm
——————-

Just by Googling “FHA is the new subprime,” you get a long list of articles and opinion pieces from people who were trying to warn about this YEARS ago.

But, of course, “NOBODY COULD SEE IT COMING!”

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