Saturday, July 24, 2010

Federal government: FHA is broke, changing rules

The Federal Register published this announcement last week:

"A recently issued independent actuarial study shows that the Mutual Mortgage Insurance Fund (MMIF) capital ratio has fallen below its statutorily mandated threshold."

FHA is required to maintain sufficient reserves as it insures all mortgages in the FHA program used by lenders. The above language is bureaucratic gobbledygook for saying "we're broke". When a bank issues an FHA mortgage to a borrower, the federal government picks up the tab if the loan goes bust. This announcement by the government comes as no surprise to me as I wrote about this a year ago in a post about the sharp increase in first-payment defaults:

"This should come as no surprise and is scary for several reasons. FHA requires a 3.5% down payment (unless you are getting funds from down payment assistance programs such as the bond money program operated by Mississippi Home Corporation.). The FHA rates for the last few years have been low, usually below 7%. The income and assets are verified, these are not "liar" loans. Despite these guidelines that should make FHA mortgages much safer than subprime, Alt-A, and Fannie Mae no-down payment loans that have exploded the housing industry, the defaults are STILL rising to very dangerous levels.

This problem does not exist because of the economy going south as there is no reason a borrower on such a mortgage should default on the first payment. Within a day or so of the mortgage's funding, the lender contacts the employer on the phone usually to verify employment just for this reason (its a standard industry practice.). The lender reviews pay stubs, tax returns, W-2's, and bank statements. There are only a handful of reasons FHA is imploding. Fraud is being committed by the lender or borrower. Sloppy underwriting practices. FHA's cashout refinances (Until recently, a borrower could get a cash-out refinance through FHA for 95% loan to value, a recipe for disaster as the default rates on such mortgages are very high.). FHA has no minimum credit score requirement (Most of the lenders have imposed their own, however.). FHA accepts "alternative" credit if a borrower has no credit history in the form of utility payments, rent payments, etc. The appraisal guidelines are not as strict as they are for Fannie and Freddie. The mortgage insurance rates are lower.

However, the pressure to use FHA programs has been great the last few years as many mortgage companies who only originated subprime mortgagees and were facing extinction obtained FHA licenses so they could pursue subprime borrowers as FHA had easier underwriting requirements compared to Fannie Mae and Freddie Mac. Some subprime lenders entered the FHA market just to stay afloat even though they lacked any FHA expertise...

Subprime crashed. Mortgage lending not supported by the government is non-existent. Fannie Mae and Freddie Mac have turned into financial money pits with no end in sight. Now we are looking at another time bomb about to go off at HUD while we are wasting our money bailing out Citi, AIG, and every one else with a hand out for some dough. The whole mess is blowing up in the faces of the politicians who don't have a clue what they are facing nor what to do. Even now, some congressmen seek to pass a law making the now-banned FHA down payment assistance programs legal once more (see note below) even though the default rates are triple those for borrowers required to make a down payment. Strap yourselves in boys and girls, the roller coaster is about to give you some more thrills and excitement as the madness continues." Earlier post

FHA has known for some time this day would come and has been allowing lenders to tighten their underwriting guidelines for FHA. However, FHA is now stating it is going to do the same thing. The same announcement states FHA is going to make the following changes:

1. reduce the amount of seller-paid closing costs from six percent to three percent of the purchase price.
2. Institute a minimum credit-score for loans. FHA did not use credit scoring at all in insuring mortgages although private lenders did.
3. Require higher down payments from borrowers with lower credit scores. FHA currently allows minimum down payments of 3.5%. Borrowers don't even have to have a down payment if using down payment assistance programs such as Mississippi Home Corp's bond money program. Unfortunately, those loans tend to have high default rates and FHA can't afford to subsidize such lending anymore.

The shortfall was first mentioned back in November 2009 in FHA's annual audit. However, FHA is now announcing it publicly and using it as a justification for tightening underwriting standards. FHA lending accounts now for nearly half of the mortgage market so any tremor at FHA is an earthquake in the housing industry. As housing continues to stumble, expect more bailouts of Fannie, Freddie, and FHA. Nearly all of the mortgage market is supported by the federal government as private mortgage lending has evaporated. This problem will be with us for years to come.

1 comment:

Anonymous said...

24 hours and no one cares.

JB



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Trollfest '07 was such a success that Jackson Jambalaya will once again host Trollfest '09. Catch this great event which will leave NE Jackson & Fondren in flames. Othor Cain and his band, The Black Power Structure headline the night while Sonjay Poontang returns for an encore performance. Former Frank Melton bodyguard Marcus Wright makes his premier appearance at Trollfest singing "I'm a Sweet Transvestite" from "The Rocky Horror Picture Show." Kamikaze will sing his new hit, “How I sold out to da Man.” Robbie Bell again performs: “Mamas, don't let your babies grow up to be Bells” and “Any friend of Ed Peters is a friend of mine”. After the show, Ms. Bell will autograph copies of her mug shot photos. In a salute to “Dancing with the Stars”, Ms. Bell and Hinds County District Attorney Robert Smith will dance the Wango Tango.

Wrestling returns, except this time it will be a Battle Royal with Othor Cain, Ben Allen, Kim Wade, Haley Fisackerly, Alan Lange, and “Big Cat” Donna Ladd all in the ring at the same time. The Battle Royal will be in a steel cage, no time limit, no referee, and the losers must leave town. Marshand Crisler will be the honorary referee (as it gives him a title without actually having to do anything).


Meet KIM Waaaaaade at the Entergy Tent. For five pesos, Kim will sell you a chance to win a deed to a crack house on Ridgeway Street stuffed in the Howard Industries pinata. Don't worry if the pinata is beaten to shreds, as Mr. Wade has Jose, Emmanuel, and Carlos, all illegal immigrants, available as replacements for the it. Upon leaving the Entergy tent, fig leaves will be available in case Entergy literally takes everything you have as part of its Trollfest ticket price adjustment charge.

Donna Ladd of The Jackson Free Press will give several classes on learning how to write. Smearing, writing without factchecking, and reporting only one side of a story will be covered. A donation to pay their taxes will be accepted and she will be signing copies of their former federal tax liens. Ms. Ladd will give a dramatic reading of her two award-winning essays (They received The Jackson Free Press "Best Of" awards.) "Why everything is always about me" and "Why I cover murders better than anyone else in Jackson".

In the spirit of helping those who are less fortunate, Trollfest '09 adopts a cause for which a portion of the proceeds and donations will be donated: Keeping Frank Melton in his home. The “Keep Frank Melton From Being Homeless” booth will sell chances for five dollars to pin the tail on the jackass. John Reeves has graciously volunteered to be the jackass for this honorable excursion into saving Frank's ass. What's an ass between two friends after all? If Mr. Reeves is unable to um, perform, Speaker Billy McCoy has also volunteered as when the word “jackass” was mentioned he immediately ran as fast as he could to sign up.


In order to help clean up the legal profession, Adam Kilgore of the Mississippi Bar will be giving away free, round-trip plane tickets to the North Pole where they keep their bar complaint forms (which are NOT available online). If you don't want to go to the North Pole, you can enjoy Brant Brantley's (of the Mississippi Commission on Judicial Performance) free guided tours of the quicksand field over by High Street where all complaints against judges disappear. If for some reason you are unable to control yourself, never fear; Judge Houston Patton will operate his jail where no lawyers are needed or allowed as you just sit there for minutes... hours.... months...years until he decides he is tired of you sitting in his jail. Do not think Judge Patton is a bad judge however as he plans to serve free Mad Dog 20/20 to all inmates.

Trollfest '09 is a pet-friendly event as well. Feel free to bring your dog with you and do not worry if your pet gets hungry, as employees of the Jackson Zoo will be on hand to provide some of their animals as food when it gets to be feeding time for your little loved one.

Relax at the Fox News Tent. Since there are only three blonde reporters in Jackson (being blonde is a requirement for working at Fox News), Megan and Kathryn from WAPT and Wendy from WLBT will be on loan to Fox. To gain admittance to the VIP section, bring either your Republican Party ID card or a Rebel Flag. Bringing both and a torn-up Obama yard sign will entitle you to free drinks served by Megan, Wendy, and Kathryn. Get your tickets now. Since this is an event for trolls, no ID is required. Just bring the hate. Bring the family, Trollfest '09 is for EVERYONE!!!

This is definitely a Beaver production.


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Trollfest '07

Jackson Jambalaya is the home of Trollfest '07. Catch this great event which promises to leave NE Jackson & Fondren in flames. Sonjay Poontang and his band headline the night with a special steel cage, no time limit "loser must leave town" bout between Alan Lange and "Big Cat"Donna Ladd following afterwards. Kamikaze will perform his new song F*** Bush, he's still a _____. Did I mention there was no referee? Dr. Heddy Matthias and Lori Gregory will face off in the undercard dueling with dangling participles and other um, devices. Robbie Bell will perform Her two latest songs: My Best Friends are in the Media and Mama's, Don't Let Your Babies Grow up to be George Bell. Sid Salter of The Clarion-Ledger will host "Pin the Tail on the Trial Lawyer", sponsored by State Farm.

There will be a hugging booth where in exchange for your young son, Frank Melton will give you a loooong hug. Trollfest will have a dunking booth where Muhammed the terrorist will curse you to Allah as you try to hit a target that will drop him into a vat of pig grease. However, in the true spirit of Separate But Equal, Don Imus and someone from NE Jackson will also sit in the dunking booth for an equal amount of time. Tom Head will give a reading for two hours on why he can't figure out who the hell he is. Cliff Cargill will give lessons with his .80 caliber desert eagle, using Frank Melton photos as targets. Tackleberry will be on hand for an autograph session. KIM Waaaaaade will be passing out free titles and deeds to crackhouses formerly owned by The Wood Street Players.

If you get tired come relax at the Fox News Tent. To gain admittance to the VIP section, bring either your Republican Party ID card or a Rebel Flag. Bringing both will entitle you to free drinks.Get your tickets now. Since this is an event for trolls, no ID is required, just bring the hate. Bring the family, Trollfest '07 is for EVERYONE!!!

This is definitely a Beaver production.

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