Nov. 21, 2009
PARALLEL UNIVERSE: Is Federal Government Creating Next Housing Meltdown With FHA Loans in High-Cost Areas?
By David M. Kinchen
Huntingtonnews.net Real Estate Writer
In the words of Capt. Renault in "Casablanca": "Round up the usual suspects!"
I'm referring to the next housing/finance crisis, which will most likely occur in high-housing cost states like California as the Federal Housing Administration (FHA) guarantees home loans on expensive real estate purchased with almost nothing down.
The New York Times writes about this in its Nov. 20, 2009 issue, citing Mike Rowland, 27, and two friends who -- with the help of FHA mortgage insurance -- bought a nearly $1 million two-unit apartment building with a down payment of only $33,000. Link: http://www.nytimes.com/2009/11/20/business/20limits.html?th=&adxnnl=1&emc=th&adxnnlx=1258732824-YiNLwqoLFEqgUunw/Roorw
I saw the story at the same time I accessed the Mortgage Bankers of America (MBA) web site to retrieve the latest loan delinquency numbers. The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.64 percent of all loans outstanding as of the end of the third quarter of 2009, up 40 basis points from the second quarter of 2009, and up 265 basis points from one year ago, the MBA said.
Bottom line: The delinquency rate breaks the record set last quarter. The records are based on MBA data dating back to 1972.
What's the connection with FHA?
MBA Chief Economist Jay Brinkmann notes that “The foreclosure rate on FHA loans also increased, despite having a large increase in the number of FHA-insured loans outstanding. The number of FHA loans outstanding has increased by about 1.1 million over the last year. This increase in the denominator depresses the delinquency and foreclosure percentages. If we assume these newly-originated loans are not the ones defaulting and remove the big denominator increase from the calculation results, the foreclosure rate would be 1.76 percent rather than 1.31 percent reported."
Brinkmann adds that the "usual suspects" are present in what could be the next crisis: “Once again the states of Florida, California, Arizona and Nevada have a disproportionate share of the mortgage problems. They had 43 percent of all foreclosures started in the third quarter, down only slightly from 44 percent both last quarter and the third quarter last year. They had 37 percent of the nation’s prime fixed-rate loan foreclosure starts and 67 percent of the prime ARM foreclosure starts. As of the end of September, 25 percent of the mortgages in Florida were at least one payment past due or in foreclosure."
The FHA doesn't make loans; it insures loans. The problem -- as the excellent New York Times story points out -- is that the FHA is underwriting loans at quadruple the rate of three years ago even as its reserves to cover defaults are dwindling. The Mortgage Bankers Association in its latest report, said more than one in six FHA borrowers was behind on payments.
FHA mortgage insurance wasn't designed for expensive housing purchases; it was created during the Great Depression for low-income families who didn't have the traditional down payment of 20 percent required by private lenders. Buyers arrange loans from government-approved lenders and must document their income and assets. The government has been very strict on this documentation. They must pay a substantial insurance premium of 1.75 percent of the loan, which is included in the monthly payment. But in return, their down payment can be as low as 3.5 percent.
From the New York Times story: "For decades, most FHA loans were in low-cost states like Texas and Michigan. Under the agency’s loan limits, houses along the coasts were usually too expensive to qualify. In 2007, fewer than 4,400 FHA. loans were made in California, according to the research firm MDA DataQuick, and none were in San Francisco.
"The Economic Stimulus Act of 2008 helped change that by temporarily doubling the maximum loan the FHA insured, to $729,750. A two-unit property like the one bought by Mr. Rowland and his friends can be insured for up to $934,200.
“'FHA financing was a lost language in San Francisco, the real estate equivalent of Aramaic,' said Michael Ackerman, the agent who represented Mr. Rowland and his friends. 'Once the limits were raised, smart buyers started calling.'”
Here's the scary part, in California -- the state with the largest number of foreclosures in the nation: The FHA has insured more than 107,000 loans so far this year in the state, according to DataQuick, about 270 of them in San Francisco.
The Times story quotes Kenneth Donohue, inspector general for the Department of Housing and urban Development, the parent agency of the FHA, who said the higher loan limits were increasing the potential risk to the FHA. Last week, the agency said its cash reserves had fallen below their Congressionally mandated minimum because of the large volume of foreclosures.
“If one of these higher-limit loans fail, that’s equivalent to two or three cheaper loans,” Donohue said. “You have to ask yourself, was the FHA ever intended to address these markets?”
He sees another risk: larger loans will be a greater draw for those who want to commit fraud. That would exacerbate a problem already besetting the agency.
The New York Times story -- and I urge readers of this commentary to read it -- notes that "Even some San Francisco agents who are doing FHA deals worry about the long-term consequences. Real estate commissions are 6 percent. If the value of a property were to hold steady, a seller who put down the FHA minimum would suffer a loss after fees. And while the Bay Area has traditionally been an excellent investment, the last few years have proved a big exception.
“'Is this going to be the next wave of the housing downturn?' asked Eileen Bermingham, an agent with Pacific Union. 'With such a minimal down payment, how do we make sure people don’t get in over their heads?'”
The FHA commissioner, David H. Stevens, said recently that its loans were relatively safe because the buyer was required to live in the property. They “are for shelter. They aren’t speculative-type investments,” Stevens said.
Here's another scary detail: Rowland and his two partners in the $963,000 purchase, Jordan Kurland, 24, and Michael Bedar, 31, are all in the technology field, where job cuts have contributed to a California unemployment rate as of Friday, Nov. 20, of 12.5 percent, two percentage points higher than the U.S. rate. "The friends plan to live in the bottom unit and rent out the top," according to the NY Times story. "Thanks to rock-bottom interest rates, none of them will pay much more than a thousand dollars a month. 'Everyone should have the chance to do this,' Mr. Kurland said."
“We’re banking on real estate,” said Kurland. “Everyone expects prices to keep going up.”
Kurland and Bedar, who are employed full time, are the buyers of record. Rowland, a freelancer, will have his interests protected by a legal agreement.
Memo to young Mr. Kurland: Real estate doesn't always go up in value, as the latest meltdown proves. It can and will go down, too.
So, I'm predicting -- almost guaranteeing, based on almost 40 years of covering real estate -- that people like Rowland, Kurland and Bedar, who have so little equity in their expensive properties, will, when (not if) they lose their jobs, walk away from the property, which will add to the already massive foreclosure numbers in the once Golden State.
You can take that to the bank!
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PARALLEL UNIVERSE: Is Federal Government Creating Next Housing Meltdown With FHA Loans in High-Cost Areas?
By David M. Kinchen
Huntingtonnews.net Real Estate Writer
In the words of Capt. Renault in "Casablanca": "Round up the usual suspects!"
I'm referring to the next housing/finance crisis, which will most likely occur in high-housing cost states like California as the Federal Housing Administration (FHA) guarantees home loans on expensive real estate purchased with almost nothing down.
The New York Times writes about this in its Nov. 20, 2009 issue, citing Mike Rowland, 27, and two friends who -- with the help of FHA mortgage insurance -- bought a nearly $1 million two-unit apartment building with a down payment of only $33,000. Link: http://www.nytimes.com/2009/11/20/business/20limits.html?th=&adxnnl=1&emc=th&adxnnlx=1258732824-YiNLwqoLFEqgUunw/Roorw
I saw the story at the same time I accessed the Mortgage Bankers of America (MBA) web site to retrieve the latest loan delinquency numbers. The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.64 percent of all loans outstanding as of the end of the third quarter of 2009, up 40 basis points from the second quarter of 2009, and up 265 basis points from one year ago, the MBA said.
Bottom line: The delinquency rate breaks the record set last quarter. The records are based on MBA data dating back to 1972.
What's the connection with FHA?
MBA Chief Economist Jay Brinkmann notes that “The foreclosure rate on FHA loans also increased, despite having a large increase in the number of FHA-insured loans outstanding. The number of FHA loans outstanding has increased by about 1.1 million over the last year. This increase in the denominator depresses the delinquency and foreclosure percentages. If we assume these newly-originated loans are not the ones defaulting and remove the big denominator increase from the calculation results, the foreclosure rate would be 1.76 percent rather than 1.31 percent reported."
Brinkmann adds that the "usual suspects" are present in what could be the next crisis: “Once again the states of Florida, California, Arizona and Nevada have a disproportionate share of the mortgage problems. They had 43 percent of all foreclosures started in the third quarter, down only slightly from 44 percent both last quarter and the third quarter last year. They had 37 percent of the nation’s prime fixed-rate loan foreclosure starts and 67 percent of the prime ARM foreclosure starts. As of the end of September, 25 percent of the mortgages in Florida were at least one payment past due or in foreclosure."
The FHA doesn't make loans; it insures loans. The problem -- as the excellent New York Times story points out -- is that the FHA is underwriting loans at quadruple the rate of three years ago even as its reserves to cover defaults are dwindling. The Mortgage Bankers Association in its latest report, said more than one in six FHA borrowers was behind on payments.
FHA mortgage insurance wasn't designed for expensive housing purchases; it was created during the Great Depression for low-income families who didn't have the traditional down payment of 20 percent required by private lenders. Buyers arrange loans from government-approved lenders and must document their income and assets. The government has been very strict on this documentation. They must pay a substantial insurance premium of 1.75 percent of the loan, which is included in the monthly payment. But in return, their down payment can be as low as 3.5 percent.
From the New York Times story: "For decades, most FHA loans were in low-cost states like Texas and Michigan. Under the agency’s loan limits, houses along the coasts were usually too expensive to qualify. In 2007, fewer than 4,400 FHA. loans were made in California, according to the research firm MDA DataQuick, and none were in San Francisco.
"The Economic Stimulus Act of 2008 helped change that by temporarily doubling the maximum loan the FHA insured, to $729,750. A two-unit property like the one bought by Mr. Rowland and his friends can be insured for up to $934,200.
“'FHA financing was a lost language in San Francisco, the real estate equivalent of Aramaic,' said Michael Ackerman, the agent who represented Mr. Rowland and his friends. 'Once the limits were raised, smart buyers started calling.'”
Here's the scary part, in California -- the state with the largest number of foreclosures in the nation: The FHA has insured more than 107,000 loans so far this year in the state, according to DataQuick, about 270 of them in San Francisco.
The Times story quotes Kenneth Donohue, inspector general for the Department of Housing and urban Development, the parent agency of the FHA, who said the higher loan limits were increasing the potential risk to the FHA. Last week, the agency said its cash reserves had fallen below their Congressionally mandated minimum because of the large volume of foreclosures.
“If one of these higher-limit loans fail, that’s equivalent to two or three cheaper loans,” Donohue said. “You have to ask yourself, was the FHA ever intended to address these markets?”
He sees another risk: larger loans will be a greater draw for those who want to commit fraud. That would exacerbate a problem already besetting the agency.
The New York Times story -- and I urge readers of this commentary to read it -- notes that "Even some San Francisco agents who are doing FHA deals worry about the long-term consequences. Real estate commissions are 6 percent. If the value of a property were to hold steady, a seller who put down the FHA minimum would suffer a loss after fees. And while the Bay Area has traditionally been an excellent investment, the last few years have proved a big exception.
“'Is this going to be the next wave of the housing downturn?' asked Eileen Bermingham, an agent with Pacific Union. 'With such a minimal down payment, how do we make sure people don’t get in over their heads?'”
The FHA commissioner, David H. Stevens, said recently that its loans were relatively safe because the buyer was required to live in the property. They “are for shelter. They aren’t speculative-type investments,” Stevens said.
Here's another scary detail: Rowland and his two partners in the $963,000 purchase, Jordan Kurland, 24, and Michael Bedar, 31, are all in the technology field, where job cuts have contributed to a California unemployment rate as of Friday, Nov. 20, of 12.5 percent, two percentage points higher than the U.S. rate. "The friends plan to live in the bottom unit and rent out the top," according to the NY Times story. "Thanks to rock-bottom interest rates, none of them will pay much more than a thousand dollars a month. 'Everyone should have the chance to do this,' Mr. Kurland said."
“We’re banking on real estate,” said Kurland. “Everyone expects prices to keep going up.”
Kurland and Bedar, who are employed full time, are the buyers of record. Rowland, a freelancer, will have his interests protected by a legal agreement.
Memo to young Mr. Kurland: Real estate doesn't always go up in value, as the latest meltdown proves. It can and will go down, too.
So, I'm predicting -- almost guaranteeing, based on almost 40 years of covering real estate -- that people like Rowland, Kurland and Bedar, who have so little equity in their expensive properties, will, when (not if) they lose their jobs, walk away from the property, which will add to the already massive foreclosure numbers in the once Golden State.
You can take that to the bank!
Share This Story:
Make HNN Your Homepage (IE Users Only) 
