FHA Home Loans Headed for Trouble?
On 12-16-08 I published a post entitled FHA Home Loans – The Next Bailout? . In that post I noted that the FHA insurance fund had dropped 39% since last year, raising concerns for the FHA requiring its own bailout. Currently, I’m receiving information from FHA insiders that since March, FHA loans are going from current status to 30 days delinquent on a monthly basis almost as fast as sub-prime, and certainly worse than any of the other types of loans.
FHA home loans allow borrowers to buy a home with only 3.5% of the sales price as a down payment (and that can be a gift). The seller can pay all the closing costs (up to 6% of the sales price which usually covers all closing fees and escrows for taxes and insurance). HUD does not require monthly payment reserves in the event the borrower gets laid off, gets hurt and is out of work or incurs some other financial stress. In some cases, the 3.5% down is ALL they have. No safety net is a big problem. In addition many of the people getting FHA mortgages tend to be lower on the socioeconomic scale and are blue collar workers. This leads to higher percentages of layoffs, firings, and injuries which can have a dramatic impact on income.
When you make high loan to value ratio loans the default rate rises. This is very predictable and therefore you must assume that this is a policy choice by FHA leadership. We will pay for this as usual.
The facts are simple. As an American, you do not have the right to OWN a home. Life choices and social status should limit a purchase such as this, just as one would with regards to a yacht.
When food, gas, and utility costs go through the roof with Cap and Trade, more people will be renting. We have to start facing the facts here.
Another FHA loan problem seems to be the fact that many real estate investors used sub-prime loans to flip their properties. However, the sub-prime loans have vanished and it’s speculated that now these real estate speculators are using FHA loans. To flip their properties, these real estate speculators gift the borrower the 3.5% down payment, pay their closing costs, even do credit repair to put buyers into their property, so they can turn a quick profit. A lot of this is done with fake pay stubs, W-2’s and falsified gifts. These straw buyers make a few payments and then default.
Even if the buyer’s intent is to make the payments, many of them are obviously failing at being responsible homeowners.
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Given the ratio to income to sales price in California the foreclosure crisis will be a California problem for many years. Until the recent bubble lending 3 times income was a good yardstick but now it ranges from 6 to 10 times income and this has become the norm. A good example would be the city of Santa Rosa BMR problem that has a cap of 50K income for houses costing 304K using the FHA 3% down program. Low income cannot afford a 300K home; only in California is this type of thinking keep alive by local and state government. In fact the State yesterday wants to give low income families 100% financing for foreclosure homes in the most impacted parts of the state. These homes require extensive rehab which low income citizens do not have and will again provide a new wave of foreclosures in the coming years.
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If you are going to buy a home that you are planning on living in, buy one that you can afford, taxes and insurance and maintenance included. The “asking” price does not tell the whole story, nor does the “adjustable” loan. People paid too much thinking they could flip the house, found no buyer and the adjustable loan was “adjusting”, just like they’d been warned. Of course, no one fore saw the gas prices, the electricity prices, the food prices going through the roof, and all the unemployment.
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It’s much harder for troubled borrowers to get a loan now. The lending industry has tightened up standards for lending to eliminate the slide of foreclosures due to subprime lending practices targeting those troubled borrowers. The local media has presented the facts in a negative light, but a return to normalcy is about to occur.
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