CFAH

As a plugged-in reader notes, the Federal Housing Administration is expected to announce a few changes with respect to standards, fees and rules for FHA-insured loans today.
Expected changes: 1. Minimum credit score of 580 (none prior); 2. Initial insurance premium of 2.25 percent of the loan (up from 1.75 percent); and 3. Maximum seller credit of 3 percent of the value of the home for closing costs (versus the current 6).

As of December, the F.H.A. was insuring 5.8 million single-family residences that had a total loan balance of $750 billion. More than half a million of the loans were seriously delinquent and heading toward foreclosure.

Many of these troubled loans were made in 2007 and 2008 as the market was plunging. Last fall, the agency said its cash reserves had tumbled to 0.5 percent of its loans outstanding, far below the 2 percent mandated by Congress.

Two years ago FHA insured mortgages accounted for less than 0.5 percent of all Bay Area home sales. This past November that number was over 26 percent.
FHA Waives Prohibition To Aid Quick Foreclosure Flips [SocketSite]
F.H.A. to Raise Standards for Mortgage Insurance [New York Times]
OMG For The FHA [SocketSite]

Comments from Plugged-In Readers

  1. Posted by anonn

    There’s a glaring lack of congruency here. Two years ago, three years ago, different loan limits in different regions, 2009 and its superconforming advent, etc etc. Come on.

  2. Posted by diemos

    Spare us your attempts at obfuscation anonn. The bottom line is that the rules had to be changed so that the gov could ride in on a white horse and save the SF market.

  3. Posted by Lance

    The increase in use of FHA loans over the past few years is pretty dramatic. Anyone know what the rate is for SF proper? I’m sure it’s quite a bit lower than 26 perecent, but I’m curious just how much lower.
    [Editor’s Note: Around 300 in 2009 (versus zero in 2007), so call it roughly 6 percent.]

  4. Posted by sfrenegade

    Agree with diemos — isn’t the whole point that the rules for FHA are different now? Sort of a duh. It’s pretty clear that FHA is filling in the void to prop up the housing market.

  5. Posted by anonn

    Obfuscation, from me? LOL. What’s 2009? What’s 2007 and 2008? These loans weren’t worth anything in this market in the past.
    [Removed by Editor]

  6. Posted by Brad

    Considering the fact that the FHA is the only way to get a mortgage with less than 20% down these days, and 1 bedroom condos are still going for 500-600k in many parts of the city, I would guess that greater than 50% of first time buyers are using FHA financing in SF.

  7. Posted by anon

    The share of FHA mortgages in the home market (purchases and refis) went from about 6 % to 36% in 4 years (7/05-7/09), with the subset of home sales going from about 4% to 18%. It’s obvious that FHA has been the backstop on the national market. Along the way loan limits were raised, repair standards were eased,the 203K program (rehab) was expanded and downpayment assistance re-emerged (default rates are also dramatically higher, but that’s another thread — just be ready for Fannie Freddie II).
    anonn: as to why the FHA role in insuring crappy mortgages raises home prices in all markets and price segments is beyond the understanding of [Removed by Editor] — stick to your forte, insults.

  8. Posted by Mike

    Min. FICO score of 580 and a 3.5% down min and only more than a half a million of these loans were seriously delinquent and heading toward foreclosure. Shocking!!

  9. Posted by corntrollio

    Indeed, Mike. Note that traditional subprime lending is a different beast from FHA lending, and FHA is in fact a lower standard than traditional subprime. Traditional prime and subprime lending require three things (the three Cs):
    1) Credit — obviously based on your credit score, subprime was typically considered to be below 620, I think
    2) Capacity to pay — this is when the bank looks through your paystubs, bank accounts, tax records, and general finances to see if you will be able to pay the loan
    3) Collateral — this ensures that the property is adequate collateral for the loan
    Traditional prime or “A” lending required a high credit score plus an adequate capacity to pay + adequate collateral. Traditional subprime lending or “B” (or maybe “C”) lending required a slightly lower credit score plus an adequate capacity to pay + adequate collateral.
    FHA requires “B” level credit, but does not ensure adequate capacity to pay (low down payment, 29/41 instead of 28/36, allows seller to pay closing, only a 1-year bar on Chapter 13, only a 2-year bar on Chapter 7, and only a 3-year bar on previous foreclosee/short sale, etc.), nor does it ensure adequate collateral (note that people on SocketSite have admitted that they have gotten FHA loans approved for non-warrantable properties).
    In contrast, what we call “subprime loans” nowadays includes many things that don’t ensure all 3 Cs. For example, “Alt-A” (which were supposed to be an alternative way to get to “A” paper) loans typically assumed that a really good credit score could overcome the lack of the other two Cs (hence, low-doc/no-doc and non-collateralizable properties were allowed).
    Anyway, long story, short, that’s why FHA is Bubble Revisited.

  10. Posted by corntrollio

    I should also mention — traditional (both prime and subprime) lending generally had predictable (and lower) default rates because the main factor that changed was credit score. That made them easily securitized and legitimately so — the ratings agencies usually did a better job with “A”, “B”, and “C” paper.
    All of these other things that we now call “subprime loans” do not have as predictable default rates. And the rating agencies tried to pretend that their modeling and the banks modeling accurately predicted defaults.
    FHA loans are similarly unpredictable because of the lower standards. No surprise we’re getting higher default rates.

  11. Posted by anonn

    How about you explain how 417K bought property in San Francisco in 2005 – 2008, anon? These bugaboo loans that are half delinquent and all that? Not here. I don’t need to insult you. You do the job for me all by your lonesome.

  12. Posted by anan

    ^^you neither understood the editor’s article nor my post.
    As for your language: everyone here realizes that you can’t help yourself, but you should really try to emulate the manner of the other realtor who posts here.

  13. Posted by anonn

    That’s a cop out. I understand how FHA works on a practical level, and I know past performance curves within other areas cannot be simply transposed locally. You should stop being derisive every single time you utter something. IT’s boring. This site is about a particular market. When people say, “Spare us your attempts at obfuscation anonn. The bottom line is that the rules had to be changed so that the gov could ride in on a white horse and save the SF market” it begs some questioning. I raised a valid point. Past performance of these loans has little to do with this market.

  14. Posted by diemos

    “You should stop being derisive every single time you utter something. IT’s boring.”
    Pot. Kettle. Black.
    “I know past performance curves within other areas cannot be simply transposed locally.”
    Technically true but obfuscation. The low downpayments associated with FHA mean that the loans go to people who don’t have the fiscal discipline to save a downpayment and also mean that they have little to no skin in the game to make waking away painful. There’s no reason to assume that you’re not going to see the same dynamic here as elsewhere. Just with bigger losses.

  15. Posted by anonn

    I’m not derisive every time and you know that.
    The low downpayments associated with FHA mean that the loans go to people who don’t have the fiscal discipline to save a downpayment and also mean that they have little to no skin in the game to make waking away painful
    That means it’s your interpretation. Obfuscation was your word, and it’s apt there.
    People walk away for two reasons by and large. The primary one, and economists on every side of this issue agree, is lost value. Looking at this singular market and particularly the 700K to 900K SFR segment FHA is utilized for within it, the value lost by the segment since FHA began getting utilized in 2009 or so isn’t at “Walk Away Levels.” In fact it’s a competitive market in this range, and the value loss so far was an event in 2008, not a continual slide throughout 2009. The second reason is job loss. While this doesn’t look great, it also doesn’t look as bad as before. It’s turning out that tech is indeed going to be better, and a lot of people are pointing at Intel’s fourth quarter as proof. We’ll see. But the fact remains that lost value has trumped job loss.

  16. Posted by anon

    While the attached reflects medians and averages, an imperfect measure, it pretty clearly reflects that SF housing saw the price declines accelerate in 2009. Those who bought with FHA loans in 2009 are almost certainly underwater already since they almost universally used extremely low down payments. But it is probably true that most of these 2009 purchases have not declined so much — yet — as of January 2010 that they are at “walk-away” underwater levels. Some certainly are down 10-20% since their 2009 purchase, however. And the point is that further declines are baked in, and we will see big losses and walk-aways among 2009 FHA purchasers because of the low down-payments.
    http://www.rereport.com/sf/index_a.html

  17. Posted by anonn

    You summarize the link that you yourself provided as “it pretty clearly reflects that SF housing saw the price declines accelerate in 2009.”
    Yet they call it this. “The median price dropped 10.8% from 2008. The good news in all this is that prices bottomed out in the first quarter and started strengthening the last nine months of the year.”
    Basically, an event in 2008, decline through March, then improvement the remaining nine months. How that can be interpreted as “and we will see big losses and walk-aways among 2009 FHA purchasers because of the low down-payments” isn’t known. FHA use didn’t even start picking up until late spring in the first place.
    I understand that the CW around here is low down payment = deadbeat. But that’s all anybody is really saying in the end. Anecdotally I have seen numerous FHA loans where significant monies down accompanied them. ~730K often needs an additional supplement of more than 3.5% in this market, still.

  18. Posted by Anon E. Mouse

    Also, we will almost certainly see immediate nominal price declines as soon as mortgage rates go up again. Doubly true for these FHA Bubble II properties, which will be underwater at that point with only 3.5% down.

  19. Posted by Embarcadero

    The “uptick” or “strengthening” of prices is, IMHO, an after-effect of the tax incentives to buy homes, which essentially boosted both the number of purchases and the price.
    I’m curious to see numbers from this quarter, and from the first quarter when FHA is no longer an originator of subprime loans.
    These recent changes, plus the upward pressure on interest rates, don’t bode well for RE prices, at least as I see things.
    I’m delighted that the FHA is making these long overdue changes.

  20. Posted by anon

    Hay anonn, you have access to the data. Why don’t you provide us with the medians and averages for the last three quarters of both 2008 and 2009. Let’s see how much “strengthening” there actually was. My sense is that what is being deemed “strengthening” by the realtor who maintains that site is, in fact, a slowing of the rate of decline as compared to the first quarter, but continuing declines nevertheless.

  21. Posted by anonn

    This website has displayed charts speaking to median gains since the March nadir numerous times. I take it you are not the anon who mischaracterized the synopsis from that link? Upward pressure on interest rates is a common refrain on here. You can look at the rates today and see differently as well. Yes, the 10 year low was at 2.3 or what have you. But recently? Mortgages have actually edged down. I looked at them this morning on bankrate.

  22. Posted by Embarcadero

    Did Bankrate say anything about the pressure on the dollar? About the limits inherent in the macroeconomics of monetary easing?
    Upward pressure on interest rates may or may not be a refrain, but it’s not a figment of anyone’s imagination. It’s a reasonable observation given the current macroeconomic picture.
    Calling March the “nadir” is wishful thinking.

  23. Posted by anonn

    Thus far March is the nadir. That’s a fact based upon this market so far. You can keep a dismissive attitude coupled with sooth saying out of anything you ever say to anyone, at any time, in life or the poor proxy of life that is the internet as far as I am concerned. A chorus of voices on here, probably yours among them, also pointed to 2007’s interest rate hikes, as well as the blip that occurred last spring, as signs that the government was done manipulating interest rate levels. That proved false both times.

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