FHA Mortgage Guide

The Center for American Progress argues that it’s the 1930s again, at least in terms of real estate.

The statement below makes you wonder: Wasn’t the FHA mortgage program supposed to mitigate the foreclosure mess — not end it, not help everyone, but just make it a little less awful?

That’s what the FHA did during the 1930s when the program was first established. But that was also a time when government didn’t worry about a “moral hazard” or philosophical purity, it worried instead about re-starting the economy after the Hoover years.

Standard & Poor’s Ratings said yesterday that banks “perhaps are just halfway through the credit downturn.” Really? Perhaps?

“What we’re really trying to answer in our own minds is which banks are going to have the financial flexibility to deal with some fairly serious problems over the next seven to eight quarters,” said Standard & Poor’s credit analyst Tanya Azarchs. “Obviously, these are very unprecedented times, and so financial flexibility — in the form of the ability to raise capital and/or in the form of the ability to sell assets — is going to be paramount.”

Seven to eight quarters sure sounds like another two years of financial turmoil.

Perhaps.

The statement from the Center for American Progress is below:

It’s 1930 all over again. While cheerleaders for the real estate industry proclaim the housing markets are ready to turn the corner, with first-time homebuyers ready to jump into the market, the reported 55 percent increase in foreclosure activity over last July should put a damper on the excitement. July marks the third month of accelerating increases in foreclosure activity reported by RealtyTrac and an unbroken streak going back to January 2006 of year-over-year increases in monthly foreclosures. With RealtyTrac reporting in excess of 750,000 bank-owned properties, we estimate that nearly 0.6 percent of all housing units in the United States are now bank-owned. While this may appear to be a small slice of the total housing stock, this is the same ratio of foreclosed properties to housing units in 1930. Foreclosures increased steadily from 1930 until peaking in 1933, at which point 10 percent of all homes had become bank-owned. They did not return to pre-Depression levels until 1938.

Now that Congress has passed and the president has signed housing legislation, there is a danger of complacency in thinking the problem has been addressed. The ball is in the loan servicers’ court to see if they will participate at meaningful rates in the new FHA loan program to refinance at-risk borrowers into sustainable loans. The Hope Now alliance of over 30 major loan services holding vast numbers of home mortgage loans reported modifying 220,000 loans during the second quarter of this year. To put that figure in context, RealtyTrac reported 272,121 foreclosure actions (notices of default, auctions, or repossessions) in July alone. If the mortgage industry doesn’t pick up the pace and more rapidly restructure or refinance existing mortgages headed for default and foreclosure, things will get worse before they get better.

Whether the situation is truly a harbinger of things becoming as dire as they did between 1930 and 1933 is something we will only know after the fact. But foreclosures are mounting, with 1 in 11 American families with a home loan in trouble as of June. If voluntary programs do not begin taking effective advantage of the tools offered by the recent housing bill, we would expect to see calls for still greater government action to avert a 1930s-like economic plunge.

Check out these FHA resources for more information

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