The Magic of the F.H.A.

Thanks to Calculated Risk for pointing out this remarkable NYT story about FHA insured loans in California.   Now, obviously, we have to be careful drawing conclusions and condemning a program based on one example - but this is not a one of a kind story.    Let me summarize my view up front, in the paraphrased words of Mike Shedlock: "You cannot keep home prices from falling by selling homes to people who cannot afford them."  Some excerpts from the NYT article:

"In January, Mike Rowland was so broke that he had to raid his retirement savings to move here from Boston.  A week ago, he and a couple of buddies bought a two-unit apartment building for nearly a million dollars. They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary.

“It was kind of crazy we could get this big a loan,” said Mr. Rowland, 27. “If a government official came out here, I would slap him a high-five.”

In its efforts to prop up a shattered housing market, the government is greatly extending its traditional support of real estate, including guaranteeing the mortgages of middle-class and even upper-class buyers against default."

High five!  Sold to you SUCKA!

"Some F.H.A. borrowers here say they have the cash for a full down payment but would rather invest it in the stock market or use it for remodeling. Others, like Mr. Rowland and his friends, simply do not have the money required by private lenders — which would have been nearly $200,000, in their case.

“We were resigned to waiting another year,” said a second partner, Michael Bedar, 31. “Then we read about the F.H.A. I had never heard of it before, and couldn’t quite believe it. But it was the answer to our problems.” They put down about $33,000, split among the three of them."

Lever it up, bayyyy-beee!  Of course, with a 3.5% down payment, they could be underwater in no time, and then disincented from actually having to pay back their mortgage.    Wait a second - isn't this what caused the housing crisis in the first place?  Banks making reckless, highly levered loans to individuals who couldn't afford the homes?   Now, it's possible that these three gentlemen each make hundreds of thousands of dollars a year, but the article makes it sound unlikely, explaining "Mr. Kurland and Mr. Bedar, who are employed full time, are the buyers of record. Mr. Rowland, a freelancer, will have his interests protected by a legal agreement."   Note - I clearly cannot judge the ability of these three 3 guys to cover the mortgage - but my point is that it's irrelevant  - 3.5% down mortgages are like playing with nitroglycerin.  If borrowers can afford a real downpayment, they shouldn't be given government sponsored leverage, and if they can't afford the downpayment, they shouldn't be given government sponsored leverage!  

 

"“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?”"

Good question, Eileen - almost by definition, anyone who can only put down 3.5% is already in over their heads.

"The F.H.A. 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,” Mr. Stevens said.

But the idea of a house as an investment dies hard. Mr. Bedar, Mr. Rowland and the third partner in their property, Jordan Kurland, are all in the technology field, but their dreams of wealth do not feature stock options.

“We’re banking on real estate,” said Mr. Kurland, 24. “Everyone expects prices to keep going up.”

Aiyahhhhhhhhhh!!!! The bubble is still alive!

"A few weeks ago, Congress extended the higher lending limits for another year. Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that he planned to introduce legislation next year raising the maximum F.H.A. loan by $100,000, to $839,750."

Oy vey.  And when the real estate market crashes again as a result of this attempted double down strategy (MARTINGALE!), Barney Frank will say that he was against giving these loans, and blame the Bush Administration.   I mean - really - why do we need to have the F.H.A insure $800,000 mortgages?!?!?  Isn't the point of the F.H.A to help poor buyers who can't afford a down payment - maybe we should have them buy MORE AFFORDABLE homes!  As the article notes: "F.H.A. insurance was created for minority and low-income families who could not come up with the traditional down payment of 20 percent required by private lenders. Buyers receive loans from government-approved lenders and are required to document their income and assets."     The F.H.A. limits should be LOWERED, not RAISED!

MISH also touched on the subject last week, exposing the lunacy in Frank's thinking:

First, MISH quoted a Richmond newspaper article:

"Exactly who made Bernadine Shimon think that she could buy a new house shortly after declaring bankruptcy and losing another home to foreclosure? The American taxpayer, that’s who.

Without a Federal Housing Administration willing to guarantee a $125,000-plus mortgage, this Denver-area schoolteacher’s recurring “dream of homeownership” could not come to pass. Shimon’s down payment was a tiny 3.5 percent.

This single mother is so strapped that she had to cash in her retirement savings to come up with the 3.5 percent. Her case was cited in a New York Times article about, not surprisingly, the sad shape the FHA finds itself in."

"With nearly a quarter of FHA loans insured in the last two years now in trouble, you’d think that the agency would show more discretion in deciding which homebuyers to help. And you’d think that Democrats running the House Financial Services Committee would be more upset over the way the FHA still hands out taxpayer guarantees.

But committee Chairman Barney Frank of Massachusetts insists that these mortgages are needed to “keep prices from falling too fast.”

Then he explained the absurdity:

"Home prices are falling precisely because houses people bought homes they could not afford.

Note however, the thought process of Barney Frank: We have to keep selling houses to people who cannot afford them in order to keep home prices from falling.

That mentality all but assures a bailout of the FHA is coming"

This is proof to me that we have not seen the bottom in housing.

-KD

full disclosure - I just bought a house - which is FURTHER evidence (based on my contrary indicator nature) that we have not seen the bottom in housing