I am shocked. Shocked! Conforming limits going back up.

Submitted by sdrealtor on November 18, 2011 - 10:27am.

I expected it and more. I expect the others will go up also. We still have another 5 to 10 years to clean up this mess and the government interventions wont stop anytime soon.

Submitted by AN on November 18, 2011 - 10:35am.

Are you just being sarcastic Rich? I'm not shocked at all. I can't believe it took this long :-)

Submitted by Rich Toscano on November 18, 2011 - 10:50am.

AN wrote:
Are you just being sarcastic Rich?

Most certainly. The only thing unexpected is that it's only FHA (for now).

Submitted by bearishgurl on November 18, 2011 - 11:01am.

If one borrows the maximum FHA loan amount of $729,750 and puts only 3.5% down on their purchase, their MIP will be HUGE under the new rules.

Up front MIP payment to escrow: $12,771
Monthly MIP payment (into oblivion, lol): $401.36

WHO would throw all this money (both up front and monthly) to the wind? Why not take the $12,771 and add it to the downpayment and try to buy FF with a 95% LTV mortgage? (PMI is surely the lesser of two evils.)

If you answer, "persons whose credit score is not high enough to qualify for FF," then IMHO, those persons have no business purchasing a $750K+ property. Perhaps they need to save far more cash and bring up their scores before purchasing RE.

An FHA loan limit of $729,750 will quickly prove to be another gubment knee-jerk debacle which will most certainly self-detonate when these borrowers can no longer pay their HUGE mortgages with monthly MIP wrapped into the required impounds... ESPECIALLY if this new mtg limit will prevail everywhere in the country.

Good L@rd, what were the powers-that-be thinking here?? :=[

Submitted by Rich Toscano on November 18, 2011 - 11:06am.

PS - Anyone who thinks I am actually shocked is invited to watch this 20-second clip: http://www.youtube.com/watch?v=-Gf8NK1WAOc

Submitted by Rich Toscano on November 18, 2011 - 11:09am.

bearishgurl wrote:
Why not take the $12,771 and add it to the downpayment and try to buy FF with a 95% LTV mortgage? (PMI is surely the lesser of two evils.)

Because FHA loans are assumable.

Submitted by bearishgurl on November 18, 2011 - 11:20am.

Rich Toscano wrote:
bearishgurl wrote:
Why not take the $12,771 and add it to the downpayment and try to buy FF with a 95% LTV mortgage? (PMI is surely the lesser of two evils.)

Because FHA loans are assumable.

IMO, current MIP is a VERY high price to pay for "assumability."

Acc to some on this board . . . ahem . . . "assumability" means nothing because a buyer who wishes to assume today must jump thru all the same hoops as a buyer qualifying straight away for a new mortgage.

Rich, do you know what the "assumption fee" is on FHA loans?

Submitted by scaredyclassic on November 18, 2011 - 11:31am.

I am not shocked but I am a little surprised even though I pretty much expected it.

Submitted by FormerSanDiegan on November 18, 2011 - 11:32am.

bearishgurl wrote:
IMO, current MIP is a VERY high price to pay for "assumability."

Acc to some on this board . . . ahem . . . "assumability" means nothing because a buyer who wishes to assume today must jump thru all the same hoops as a buyer qualifying straight away for a new mortgage.

Rich, do you know what the "assumption fee" is on FHA loans?

Whether the MIP is a high price to pay depends on future interest rates. I agree that $400 per month on $700K is a lot to pay to assume a 4% rate in a 4% rate environment (~today's rates)

BUT, what if rates go up to 7%. At that point $400 per month is a good deal to get a 4% interest rate.

Submitted by Rich Toscano on November 18, 2011 - 11:42am.

Yes, what FSD wrote sums up my opinion. I think there is a high probability of much higher rates, so assumability strikes me as very valuable. I admit that I haven't actually run the numbers, though. (That said, the assumption fee seems nominal, as far as I can tell).

Submitted by enron_by_the_sea on November 18, 2011 - 11:44am.

What happened to the Tea Party? Weren't they supposed to stop all this?

Submitted by bearishgurl on November 18, 2011 - 11:49am.

Proposed new FHA purchase in SD, CA using new loan limit of $729,750 (with $12771 MIP escrow deposit):

$748,450 purch price (no HOA or MR)
$ 18,700 3.5% downpayment

$729,750 Mortgage at 4% fixed

P&I = $3480.91
Taxes = 729.74
Ins = 161.17 (non fire-risk area)
MIP = 401.36

Total $4773.18 (mo PITI + MIP)

Amount of MIP deposited (assuming all pymts are timely made):

by 13th month of ownership = $17,587.64
by 25th month of ownership = $22,403.96
by 37th month of ownership = $27,220.28

Is this enough cash to protect HUD (another acronym for "gubment") if this borrower should default in these first three critical years??

I don't think so. Assuming the loan doesn't go bad until the 37th month, $27,220.28/$3,480.91 = 7.82 months of P&I in "reserves." And this doesn't even cover late fees, trustees fees, unpaid taxes, insurance and clean up/maintenance on the REO!

And I've never met a HUD home that took less than nine months to get there. In recent years it has taken up to three years for an FHA mortgage to foreclose.

I don't think I need to ask here who will end up footing this bill .... :=0

Submitted by sdrealtor on November 18, 2011 - 11:53am.

Sorry but you are twisting my words. Assuming your old TOXIC OPTION ARM today when rates are sub 4% means NOTHING. In the future, someone being able to assume a 30 year FIXED rate loan at 3.75% could have lots of value. Sorry....you lose again BG

Submitted by FormerSanDiegan on November 18, 2011 - 11:58am.

bearishgurl wrote:

Amount of MIP deposited (assuming all pymts are timely made):

by 13th month of ownership = $17,587.64
by 25th month of ownership = $22,403.96
by 37th month of ownership = $27,220.28

Is this enough cash to protect HUD (another acronym for "gubment") if this borrower should default in these first three critical years??

It depends on the default rate...

If the default rate is 10%, that's 175K per foreclosure through month 13 and 275K per foreclosure through month 37.

If the 3-year default rate is 10%, I don;t think HUD would lose much on that 730K loan. (asusming prices don'tall more than 10%).

In fact if they can charge these rates and get a 10% default rate in a market where prices are flat, they will make money hand over fist (and make up for the losses they are currently suffering on previous loans where the rates they set were too low).

Submitted by bearishgurl on November 18, 2011 - 12:02pm.

sdrealtor wrote:
Sorry but you are twisting my words. Assuming your old TOXIC OPTION ARM today when rates are sub 4% means NOTHING. In the future, someone being able to assume a 30 year FIXED rate loan at 3.75% could have lots of value. Sorry....you lose again BG

For the record, FHA rates are currently just over 4%.

And again, mainstream prime and Alt-A OPTION ARMS of the 1984-2002 era were NOT "toxic!"

The reason OPTION ARMS were given a bad rep of late is due to them being later turned into sub-prime vehicles for the purpose of funding RE purchases for "toxic" borrowers! The features of these loans bear no resemblance to mine.

Submitted by sdrealtor on November 18, 2011 - 12:23pm.

Face it BG there are better FIXED rate loans available today and they will be available for the next few years in your projected selling window. The assumability of your loan does not have any meaningfull value in the current environment>

Whatever you want to beleive.......LOL

Submitted by bearishgurl on November 18, 2011 - 12:29pm.

FormerSanDiegan wrote:
bearishgurl wrote:

Amount of MIP deposited (assuming all pymts are timely made):

by 13th month of ownership = $17,587.64
by 25th month of ownership = $22,403.96
by 37th month of ownership = $27,220.28

Is this enough cash to protect HUD (another acronym for "gubment") if this borrower should default in these first three critical years??

It depends on the default rate...

From an 11-15-11 article:

The dangers of a low rate environment

Let us assume we operated in a truly free market (which we don’t) then an interest rate would truly reflect the risk of lending out money to a venture or a securitized asset. Yet in this current market we are largely operating in a distorted netherworld of easy money. Is there really almost no risk in giving a 30 year mortgage to someone in this volatile economy? Absolutely but current mortgage rates reflect an almost risk free bet that the 30 year note will be paid in full. This reminds me of Taleb’s Black Swan where you are right until you are wrong. Home values never went down on a nationwide basis prior to the Great Depression, until they did. This is why problems are now cropping up with FHA insured loans:

FHA "Foreclosure Impact" ChartFHA "Foreclosure Impact" Chart

FHA defaults are now surging as a percent of the overall mortgage market. Of course this would make sense since FHA loans stepped in largely in 2008 and going forward for the low down payment market. It should be no shock that things are getting bad quickly because a low rate can’t make up for a lost job or low income growth.

http://www.doctorhousingbubble.com/mark-...

And a March 2010 report (which preceded the passing of the current [lower] FHA limits and MIP rules):

...About 9.1 percent of FHA borrowers are in default, having missed at least three payments as of December 2009, a statistic that has gone up from 6.5 percent a year ago—which is a 40 percent increase in this statistic in one year. Although the FHA expects the tidal wave of defaults to gradually abate over time, assuming perhaps an “Earlier Recovery” scenario, there are signs that the reduction in real estate values may also be contributing to the growing defaults and claims debacle.

http://nationalmortgageprofessional.com/...

Submitted by bearishgurl on November 18, 2011 - 12:51pm.

I want to add here that I believe in the concept of FHA loans. They were originally designed to give first-time buyers a "leg up" into the housing market. I believe a $300K loan limit (for the SD region) is more than sufficient today for this purpose. I just don't feel that it is an appropriate for the FHA to be available to finance upscale or luxury properties (or even fixers in highly desirable areas). Persons who are buyers in these categories need to use their own money and obtain a conventional mortgage, if necessary. IMO, by HUD taking on individual risks this large, the taxpayers will unwittingly be subsidizing more "luxury home" defaults.

Submitted by Rich Toscano on November 18, 2011 - 1:02pm.

Here is an article from someone who has run the numbers on the value of assumability: http://www.washingtonpost.com/wp-dyn/con...

Of course the estimates vary based on assumptions, but under some circumstances it could be very valuable.

That's the more important set of assumptions, in my opinion, because under the current conditions I see assumability as a form of insurance. You have to pay a little more (via the higher costs to FHA loans), but IF rates do go up a whole lot, that money will pay itself back many times over.

When I consider buying, the biggest risk I see is the high probability of much higher rates in the years to come. By getting an FHA loan, I can mitigate this risk to a pretty good degree. So I see the assumability as an insurance policy that protects me to some degree from rising rates, and since I think a steep rate rise is likely, it is very much worth the higher cost for the FHA loan.

Submitted by harvey on November 18, 2011 - 1:37pm.

Quote:
I see assumability as a form of insurance.

FHA buyers are derivatives traders, but probably don't even know it.

Quote:
When I consider buying, the biggest risk I see is the high probability of much higher rates in the years to come.

What risk are you really protecting against - loss of value of the property due to rising rates?

Isn't the correlation between interest rates and housing prices somewhat weak?

Video was hilarious, BTW.

EDIT: I thought about it a bit and now understand what you mean. Seems to only be applicable in a very narrow range of scenarios. Does have value though.

Submitted by FormerSanDiegan on November 18, 2011 - 1:22pm.

So if 2009 and earlier FHA loans defaulted at 9.1 %, what is the likelihood that loans made in 2012 and later, at this new, higher limit and at lower prices, lower rates (and further along in the real estate and economic cycle) will exceed that and current default rates ?

Submitted by Rich Toscano on November 18, 2011 - 2:06pm.

pri_dk - You are right, there not much of a correlation between home prices and rates. (Nominal rates anyway... it occurs to me that I need to do a correlation between prices are real rates -- but I digress).

Anyway, while there is not a great historical correlation, each time period is different, and I could see a scenario where rates could actually hurt prices. It kind of depends on what's driving rates... if it's wage-driven inflation, that might not be so bad; if it's a run on sovereign debt (and/or mortgages), I think that could definitely hurt prices because you wouldn't have the offsetting wage inflation.

But this actually doesn't really matter. Even if rates went up but home prices didn't go down, I'd still be able to offer a lower-than-market rate, which would presumably increase the market price for the home from what it would have been with a non-assumable loan.

If you look at it that way, you're right, it's more a "derivative" than it is insurance.

But, I think that a rising rate environment which is driven by decreasing confidence in govt debt would be just a generally bad environment for housing, both from the direct rate rise and indirectly from the negative economic effects -- so I see an assumable loan as providing some protection against that potential outcome.

Submitted by moneymaker on November 18, 2011 - 2:08pm.

So Rich it sounds like you are being tempted to buy. I think there are probably a lot of people out there that have sufficient incomes to buy above $700k but may not have good credit or be short on cash right now. Before being a homeoccupier(it's not mine yet) I would have probably agreed with bearishgurl, but now in this market while living in San Diego I think it is a good move on the governments part as now they can shovel in a bunch of cash as upfrontMIP and really how much lower can houses get? Ooops maybe I shouldn't have asked that. By the way I'm still treading water.

Submitted by AK on November 18, 2011 - 2:38pm.

Assumability did factor into my decision to go with a VA loan. (Incidentally a non-veteran can apply to assume a VA loan, but the original borrower won't be able to take out another one until the first loan is paid off.)

I remember the early '80s when real estate ads touted the availability of assumable FHA or VA loans -- no big deal when interest rates rose into double digits. But the way I see it assumability is most useful if you're forced to sell within the first few years of ownership. Otherwise you need a buyer who can bring cash or can finance the difference. Those aren't easy things to come by these days ...

Submitted by SK in CV on November 18, 2011 - 2:50pm.

Rich Toscano wrote:
But this actually doesn't really matter. Even if rates went up but home prices didn't go down, I'd still be able to offer a lower-than-market rate, which would presumably increase the market price for the home from what it would have been with a non-assumable loan.

But, on the other hand, if rates went up and prices did fall, you're upside down and the value of that assumable loan just disappeared. (Maybe. I have no idea if upside down loans are assumable. I'm guessing that an appraisal is part of the assumption process. Though I'm also assuming that reasonable standards are included in FHA rules. What am I thinking?)

Submitted by urbanrealtor on November 18, 2011 - 3:17pm.

Rich Toscano wrote:

But, I think that a rising rate environment which is driven by decreasing confidence in govt debt would be just a generally bad environment for housing, both from the direct rate rise and indirectly from the negative economic effects -- so I see an assumable loan as providing some protection against that potential outcome.

Well thats really the question, isn't it?

We don't know what effect heavy debt in a major currency has.

We know what it looks like when Argentina or Iceland over-borrows and we know what it looks like when countries over-borrow in exogenous currency.

We don't know what it looks like when a very big country (whose currency is the denomination for most global debt) over-borrows.

I am of the opinion that confidence is really more of a relative thing.

It functions on the being-chased-by-zombies logic.

Thats the idea that you don't need enough bullets to kill all the zombies.

Instead, you just need to run faster than the dude next to you (maybe by putting your last bullet in his leg).

You don't need to have a great currency (whatever that means).

You just need to have a more stable currency than Europe (who is having trouble holding its intestines in) or China (who is effectively tied to Europe, its biggest customer) or Japan (who is apparently the La Brea of economies).

Every other currency is small enough or weak enough that we win (until more zombies come along).

Bear in mind our credit got BETTER after the downgrade (eat lead..errr...leverage spread mutha fucka!!!!).

That gives us a hint of how fucked the rest of the world is with regard to debt and stability (and zombies).

We are still widely seen as the best risk for lending.

The trick is finding out what could change that.

Defaulting might do it.

Submitted by urbanrealtor on November 18, 2011 - 3:22pm.

I really really want to write a zombie movie that includes leverage spreads as a plot point.

Submitted by SK in CV on November 18, 2011 - 3:27pm.

urbanrealtor wrote:

Defaulting might do it.

Ya think?

Submitted by Rich Toscano on November 18, 2011 - 3:33pm.

SK in CV wrote:
Rich Toscano wrote:
But this actually doesn't really matter. Even if rates went up but home prices didn't go down, I'd still be able to offer a lower-than-market rate, which would presumably increase the market price for the home from what it would have been with a non-assumable loan.

But, on the other hand, if rates went up and prices did fall, you're upside down and the value of that assumable loan just disappeared. (Maybe. I have no idea if upside down loans are assumable. I'm guessing that an appraisal is part of the assumption process. Though I'm also assuming that reasonable standards are included in FHA rules. What am I thinking?)

Good point, SK, but on the other hand, having an assumable loan should increase the value of the home from what it otherwise would have been... so maybe you won't be upside-down after all?

Submitted by urbanrealtor on November 18, 2011 - 3:43pm.

Rich Toscano wrote:
SK in CV wrote:
Rich Toscano wrote:
But this actually doesn't really matter. Even if rates went up but home prices didn't go down, I'd still be able to offer a lower-than-market rate, which would presumably increase the market price for the home from what it would have been with a non-assumable loan.

But, on the other hand, if rates went up and prices did fall, you're upside down and the value of that assumable loan just disappeared. (Maybe. I have no idea if upside down loans are assumable. I'm guessing that an appraisal is part of the assumption process. Though I'm also assuming that reasonable standards are included in FHA rules. What am I thinking?)

Good point, SK, but on the other hand, having an assumable loan should increase the value of the home from what it otherwise would have been... so maybe you won't be upside-down after all?

Thats actually a good point.
A property with a FMV of 200k might sell for $250k if it meant lower payments and no new appraisal. Honestly, its so rare these days that I really don't know how loan assumptions work.

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