The report out today says that the Federal Housing Administration is having the busiest year in its history.
Almost a year after the federal government launched its rescue of the housing market, nearly one in four new mortgages is insured by the Federal Housing Administration.
FHA loans also have become more popular because of the demise of many subprime lenders, which sometimes allowed buyers to purchase a property with nothing down and no documentation of income.
Remember what went wrong with the subprime housing market? People getting easy credit with "no skin" in the game buying houses they couldn't afford. Oh sure, there was massive fraud too, but that wasn't the cause of the bubble.
And yet, the federal government seems determined to do the exact same thing that got us into trouble in the first place. Only this time it is your taxpayer dollars that are financing it.
The FHA's entrance into the housing market has been dramatic to say the least.
From Oct. 1 through mid-August, applications for FHA single-family-home mortgages were up 50%, to 2.52 million, from the same period a year earlier.
Approvals for purchases, refinancings and reverse mortgages rose 70% to 1.67 million.
Eighty percent of the FHA mortgages for purchasing homes went to first-time buyers drawn to the FHA's low-down payment requirements, starting at 3.5%. Private lenders making conventional loans typically require at least 10% down.
The FHA's market share, about 3% in 2006, has swollen to more than 23%. With credit still tight, many borrowers could not get a mortgage without FHA help.
FHA loans "are one of the most important sources in this market," says Mark Zandi of Moody's Economy.com. "Without FHA, the housing slide would be much more severe. We wouldn't be talking about a recovery now. We'd still be talking about a crash."
On top of the sheer volume involved, the FHA has expanded the size of the mortgages it handles to a $729,750 ceiling. Obviously we aren't talking about helping low-income families anymore - the reason the FHA was created.
As far as mortgage lenders are concerned, this isn't nearly enough.
(Bloomberg) -- Mortgage bankers are pushing Congress to expand the U.S. government’s support of the market by guaranteeing private-industry home-loan securities and replacing finance companies Fannie Mae and Freddie Mac.
Putting the “full faith and credit” of the U.S. Treasury behind a portion of the $1.8 trillion non-agency mortgage market would help boost a once-dominant form of home-loan financing that almost collapsed in 2007 as delinquencies rose. The association, which represents about 2,400 lenders, mortgage brokers, commercial banks, thrifts and other companies, said the importance of housing to the U.S. “economic and social fabric” warrants a federal government role in mortgage liquidity.
In other words, mortgage lenders want to transfer pretty much ALL of the lending risk onto the taxpayer (i.e. losses from defaults), while they still get to collect any profits available.
Their plan has all the benefits of the 2002-2007 housing bubble, without any of the costs...at least for them.
Let's get back to people purchasing homes with nothing down. The FHA requires a 3.5% deposit, a lot less than the private sector, but still something. Right?
The days of home buying with little or no money down may be back-this time thanks to Uncle Sam.
Blamed for contributing to the housing bubble, zero-down-payment loans largely vanished when the market crashed and Congress blocked seller financing for government-backed loans. Now the federal government will be forking over cash at closing.
Buyers who haven’t owned a home for three years or longer are eligible for an $8,000 tax credit, thanks to a provision in this winter’s stimulus package. Now, under a little-noticed program announced May 29, the Federal Housing Administration will steer the funds to cover closing costs directly-in some cases even offsetting the 3.5% minimum down payment FHA loans require. That’s enough to cover most or all of the down payment and fees for homes up to the U.S. median price, now about $169,000.”
When you consider this little tidbit, it makes perfect sense for FHA loans volume to be so much higher than it was last year. It also explains why the lower-end of the housing market is booming.
It's free money!
It's also the exact same mistakes the mortgage lending industry made just a few years ago. The text of the HUD program can be found here.
The average credit score of FHA borrowers has dropped from 690 to 630 in the last two years.
When you combine this with seller funded downpayments you have all the worst elements of the housing bubble, minus the no-doc loans.
These loans are going towards the same housing bubble states that just experienced the recent disaster.
Let's go back to that $8,000 tax credit. Just how big of an impact is it having?
NAR estimates that about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.
This effort to reinflate the housing bubble comes at an enormous cost. The FHLB of Boston lost $4.2 Billion in the second quarter of 2009 alone. Six of the twelve FHLBs reported losses in the first quarter, and all of them hold assets with enormous amounts of unrealized losses.
Of course the federal government's attempts at reinflating the housing bubble don't stop with the FHLBs. Our friends at the company formerly known as Fannie Mae has been busy too.
Back in May, while Fannie Mae was reporting a $23.2 Billion loss in the first quarter, and asking for another $19 Billion bailout from the Treasury, they also announced that their company was now 90% of the reverse mortgage market.
By no small coincidence, Fannie had this to say just a few months earlier.
Fannie Mae can refinance loans up to 105 percent of a home's value with this new flexibility, so even borrowers who are "underwater" -- who owe more than their home is worth -- may be able to refinance.
Isn't that nice? Just like during the housing bubble, only with taxpayer money now.
So how has Fannie done more recently? Well, they lost another $14.8 Billion in the second quarter and are seeking another $10.7 Billion in taxpayer dollars through the Treasury. Despite these enormous losses it recently reported that its business grew at a 10 percent rate in July and that it's portfolio value was 20% below its purchase value.
Freddie Mac, the other GSE, also saw its portfolio drop at a 45 percent annualized rate in July.
Despite these headwinds, the stocks of Fannie and Freddie exploded upwards in a speculative boom over the past few months. But that's all it is - speculation.
“There is no fundamental value remaining in Fannie and Freddie, particularly since the government owns 80 percent of each company,” Miller, a banking analyst based in Arlington, Virginia, said in a note to investors today.
“There’s no value,” Miller said in that interview. “This is all speculation.”
The two GSE's have posted $165.3 Billion in net losses over the last two years, and have required $95.6 Billion in taxpayer bailouts since November.
Some may say that these monstrous losses that the taxpayer is incurring is some how "worth it" because the housing market would be so much worse off, and that the effort is moral and just.
I have several responses to those comments:
1) These losses, that only benefit the here and now, will have to be paid back by the next generation. I don't believe that the proponents of these programs are fully accounting the morality of the bill that must be paid back by citizens who will never benefit from it.
2) The results of these programs so far have been marginal at best. Foreclosures are still hitting new highs, with much more to come, while housing prices have continued to fall. That's not much bang for the buck. It's not very bold to say that perhaps are efforts are misdirected.
3) We are using almost the exact same methods to prop up housing that created the bubble in the first place. We are lending to people who are nearly as incapable of paying their mortgage as the people who are defaulting on their mortgages now. Why on Earth should we expect different results this time around? It's insanity.
4) Finally, we should question whether owning a mortgage that you can't really afford is part of the American Dream. Even the Federal Reserve has questioned the effectiveness of the mandates of Fannie and Freddie to create affordable housing for all.
This evidence conforms to the intuition that the GSEs would expand relatively stable neighborhoods where expansion is least costly, and suggests that the GSEs goal-related efforts conflict with the law’s intent to help stabilize neighborhoods in decline.
Overall, the results indicate that the goals bind but only slightly expanded lower-income and minority credit flow in the mid-1990s.
There comes a time when you must cut your losses. That time is now.