How Would Lower Prices Impact the House FHA Mortgage Bill?
May 20th, 2008
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JDJ raised an important point regarding FHA mortgages and the legislation just passed by the House:
“One thing that I’ve never heard the supporters of this and other bailout plans is: What happens if house prices keep falling after the new FHA mortgage is written?
“The purported reason for the bailout is to get borrowers out of underwater loans. So, if they go back underwater in 6 months or a year, then what? Do it all over again?
“It is reckless to tell borrowers that simply by dint of the fact that they are underwater that they deserve to be rescued by the government. What do you tell these people when their new loans are underwater? Why wouldn’t they bray like lusty animals for another bailout?”
Now that we have a finalized House bill to consider it becomes possible to respond to this issue.
In an absolute sense, there’s no assurance that prices will stabilize and, yes, they could certainly decline further. Alternatively, when lenders make loans there’s no absolute assurance that even one borrower will repay a debt. Happily, we do not live in an absolutist world.
The House bill essentially requires lenders to take a loss on every loan refinanced under the proposed FHA program. However this must be seen in context: With a foreclosure lenders have big losses anyway, from 30 to 60 percent of the loan amount according to a new study by the Congressional budget Office. This is far-steeper than any previous calculation I have seen, potentially far more than the $40,000 to $80,000 per property loss estimates used in the past.
What the House bill really does is force lenders to take a loss — loans under the House bill would only fund 90 percent of the current mortgage debt. Lenders would also have to chip in with a 3-percent loan loss reserve plus 2 percent for closing costs. Meanwhile, the borrower will face a 3 percent “exit” whenever the loan is paid off plus the usual up-front and monthly mortgage insurance premiums.
In effect, the FHA will finance on a discounted basis while at the same time it will bulk up on fees and charges to both borrowers and lenders.
While losses to the FHA program are entirely possible, the borrower in such transactions is typically getting a smaller loan amount and a lower interest rate, meaning that monthly costs would both stabilize and drop significantly. Even if home values go down, a borrower would be smart to stay with the property — and the new loan — because if the market declines further there would be little chance of getting a better deal.
The important point, then, is not whether values rise or fall, rather it is that if values fall the borrower still has a reason to make those monthly payments.
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May 20th, 2008 at 6:19 am
The Chicken or the Egg?
It must be plainly obvious to lenders and mortgage insurance companies alike that as they continue to yank programs and tighten their underwriting guidelines, they take more and more borrowers out of the market, further weakening demand. They are so concerned with not making any more bad loans while they watch their own portfolios weaken as more and more potential buyers are removed from the marketplace because of these underwriting policies.
The U.S. real estate market would be best served by helping more people qualify for loans, not less, yet that is the exact opposite of what is happening. Everyone is in agreement that lenders will begin to loosen their guidelines only after the market begins to show signs of stabilizing.
So what comes first - a stabilizing real estate market or programs that ease the requirements of borrowing? I say, we can’t have the first without the second, but it looks as though no lender/insurance company will be the guinea pig without government involvement. Too bad.
While government non-intervention is much preferred, time and time again we see that industries are not able to regulate themselves. We wouldn’t be in this mess if they could.
May 20th, 2008 at 3:08 pm
I don’t quite understand the logic of getting out of the current housing situation–which was caused by private lenders loosening their underwriting standards–by demanding the government to now relax their underwriting standards.
If standards had never been relaxed in the first place there wouldn’t have been the artificial demand over the past 6 years, builders wouldn’t have built far too many homes and prices wouldn’t have gone parabolic.
It’s time to stop thinking that this just collapsed housing boom was the norm and get used to the reality that we borrowed many years from future demand and now that slack has to be painfully absorbed. “Affordability products” will not do anymore, it’s time for people to actually get fully amortizing loans with fixed-rates, put some skin in the game, at long last, and forget about housing as a financial sure thing.
Forget loosening underwriting and focus on how we can convince current homeowners to lower their prices and get these houses sold. Because lower prices are the answer, whether through banks taking a haircut via a bailout or through homeowners taking a haircut by lowering their asking price. Either way, the price is going down. Does anybody really think that a lender who just took a 25% haircut and sold to the FHA is going to turn around and loan a new home buyer any more than the new government mandated comp for houses in that same neighborhood.
May 21st, 2008 at 11:44 am
JdJ is incorrect regarding private lenders relaxing credit guidelines. This mortgage mess was created by our Fed Govt’s desire to increase homeownership. FNMA and FHLMC relaxed its underwriting guidelines. These two are the principal purchasers of mortgage loans in the country and as goes FNMA and FHLMC so goes the mortgage industry. Brokers and Lenders were receiving guidelines from the GSE’s (government sponsored Enterprise)on how to use alternative income and assets for obtaining loan approvals for persons such as illegal aliens with no credit history. No mortgage broker every approved a loan or created a loan program. Everything came from the GSE’s.
May 23rd, 2008 at 12:19 pm
And no mortgage broker was ever forced to lower their standards just because the GSEs did. Mortgage brokers sure lapped up the YSPs on those crap loans though didn’t they?
August 19th, 2008 at 3:35 pm
Cheers to the good times for they have passed. We are screwed for a decade cause the housing markets squashed.
Dont fret for the bailouts are abound. The government is here to show the world we are clowns.
If it is money you want, theres plenty to go around. Welfare shall surely suffice throughtout the mortgage melt-down.
November 28th, 2008 at 10:18 am
For starters let me explain one thing. F.H.A guidelines want home ownwers and builders to take some of the burden off of them by having homeowners lower thier prices to within FHA borrowing guidelines. This is the only way to keep potential buyers in the game if the homes are priced well out of thier range and fha only covers a loan up to 350 thousand, then how is the average (JOE the plumber going to buy a home?) I know what your thinking well he can put more down but there again is the quandery how do you get something from not much. The housing market will continue to falter until the gov either raises the limits or builders start building houses that people can afford.