0
0

Bailout mutates into FHA "modernization"


 invite response                
2007 May 6, 10:24am   17,416 views  135 comments

by Patrick   ➕follow (55)   💰tip   ignore  

fha logo

Now we hear that the the Federal Housing Administration wants to keep the subprime shell game going by eliminating downpayments entirely:

FHA Modern is So Subprime

What is wrong with FHA subprimization?

Private lenders have realized the risk in subprime and increased their demands on the borrowers, upping downpayment requirements. But now the government wants to step in with federal guarantees for loans that don't require downpayments at all anymore. Can the government assess lending risks better than banks can? I don't think so.

The justification is that the FHA needs to take back market share from other lenders, market share that it lost in 2001-2005. This is silly. The taking-back is already happening, with existing guidelines, because private lenders don't want to touch certain customers anymore.

The use of federal loan guarantees moves the problem from today's budget to tomorow's budget. It hides the federal liabilities in rosy assumptions that the housing prices won't fall, like it did in its model of subprime lending - we know now how that worked. Why repeat the error on a bigger scale?

The making of a downpayment is a blessing for all, the borrower, the lender, and the public:

- The borrower has shown that he can earn and save that kind of money.
- The borrower gets a better feeling for the true price of the house.
- The lender knows that the borrower has skin in the game and will fight to keep his mortgage from defaulting.
- If the borrower has to move unexpectedly, he is less likely to be underwater and be forced to come up with money for a short sale: the ability to move is good for the economy.
- It reduces leverage in the whole financial system.

Regards,

Peter T.

#housing

Comments 1 - 40 of 135       Last »     Search these comments

1   Malcolm   2007 May 6, 11:07am  

It is a shell game, but they are running out of options. It is funny to note that some of the legislators in DC wanted to require downpayments as part of the guidlines of subprime reform. Now the government wants to participate in the poor lending practices that it has been criticizing. The only conclusion is that the bubble popping is much worse than they are revealing, and they have now discovered for themselves that very very few people are actually qualified under normal standards to buy the average home.

2   Malcolm   2007 May 6, 11:33am  

Patrick, one problem with the blog. The housing bubble used to be a controversial issue which made for heated debates. What are you going to do now that the debate is dead? You don't see anyone strongly disagreeing with the threads anymore.

3   Brand165   2007 May 6, 11:45am  

Except Big Brother / Confused Renter / Opinions Please / Marina Prime. But that's not really disagreement, it's more denial.

I may have to write my Senator another letter about this ridiculous "modernization" plan. Who puts these politicians in charge, anyway? Yeesh.

4   Malcolm   2007 May 6, 11:51am  

But even their denials seem more and more apathetic each go around. It's almost sad, like reality is setting in. Now we don't even have David Lereah to demonize anymore. His poor mom, I feel bad that she cried about the internet criticisms.

5   azrob   2007 May 6, 12:10pm  

This of course is a terrible idea for Fannie Mae Freddie Mac... Though truthfully, FHA has had 0 down for a while, just use one of the many govt programs and get the seller to "contribute" 5%. The program never made sense to me, as the buyers downpayment is gifted from another source, but the downpayment is only 3% when its all said and done, so 2% magically disappears in fees. And obviously, the home must have been worth 5% less then the appraisal or the seller would never accept this arrangment. I wrote a number of real estate transactions using this theme over the last 15 years. Here in arizona, we occassionaly have "bond money" when the county will loan the 5% down for a first time homebuyer who meets certain criteria... reasonable credit and income below a threshold. They keep a lean on the property for the 5% if you sell within the first few years, but after that it was a free gift.
These programs existed years before the bubble as well...

just my $.02

6   anonymous   2007 May 6, 12:26pm  

*unlurks*

even more OT: where has Nomadtoons / willywhopper2 / shtf been? Still busy moving back to the southeast? I've been waiting for him to check in!

*relurks*

7   Patrick   2007 May 6, 1:09pm  

I will kind of miss Lereah, because his lies were so transparent, yet so many people believed them. Made a nice target, and a worthwhile one.

I think there's still quite a bit of denial going on, so plenty of blog fodder. (And forum fodder too!)

Patrick

8   Malcolm   2007 May 6, 1:22pm  

Azrob, we had those same programs here in California, because it is federal of course, but California at one time was also doing small grants for the closing costs.

9   Malcolm   2007 May 6, 1:23pm  

Good Patrick, keep up the fight!!!

10   Philistine   2007 May 6, 1:36pm  

If my spouse and I make combined $140,000, then is that "too high" for assistance programs in CA? We'll never scrimp together a sizable downpayment they way we spend money on lattes, trendy clothes, and new cars. If that IS too high, then I'll just get the 'rents to dole out my downpayment like all of my other trustfund friends who have careers on a lark.

11   Randy H   2007 May 6, 1:37pm  

Eliminating down payments won't help if they don't adjust their lending limits.

A single family purchase in SF will entitle you to $362,790 worth of FHA loan. Given that you'll need another half million to actually buy the place, so much for the subprime crowd.

12   Malcolm   2007 May 6, 1:38pm  

On topic, from a lot of the articles, it seemed the FHA guarantee program basically had obsoleted itself because of the loan caps. This is a disturbing development when government decides to expand an entitlement program because of a lack of takers.

13   Malcolm   2007 May 6, 1:40pm  

Ha we just said the same thing at the same time.

15   Allah   2007 May 6, 1:54pm  

Those assistance programs don't help the buyer; they are just a pitifull attempt to slow down the crash. After all the phoney financing is gone and people have to use real money to buy, they are only going to spend what they can reasonably afford; thus pushing prices to their affordability level. These down payment assistance programs and grants are only throwing money where it's not needed. Give everyone $50k to buy a house and it will only increase everyone's budget by $50k which effectively holds prices up by $50k from where they normally would be. We have these kinds of programs here on the east coast and they are available to anyone, even those who make above the median income. It's welfare for the middle class.

The loan caps on the FHA loans are going to be increased; you can be sure of it.

16   Malcolm   2007 May 6, 1:56pm  

Why does this seem like common sense to anyone with a brain, yet the media continously clammers around the 'what is the government going to do about this' point of view?

17   Malcolm   2007 May 6, 2:02pm  

I sense that the politicians have been genuinely surprised by the tough love opinions of their constituents.

18   Randy H   2007 May 6, 2:05pm  

Tragedy of the commons?

Tyranny of the majority?

19   Malcolm   2007 May 6, 2:09pm  

That is going to be awesome, that is going to be a speech for the economics textbooks. Seriously in 5 years this is going to be a subject in MBA programs. There are all kinds of different variables that will be great research topics for Economic MBAs.

20   Malcolm   2007 May 6, 2:14pm  

I can definitely see the tragedy of the commons phenomenon at play here. Each seller like myself, didn't see any harm in kicking back 5 or 10K to what seemed like a buyer working their way up in life. Then you realize everyone did it, and that skewed the numbers even more than they had been skewed, and it literally screwed some in the non prop 13 states who paid artificially high property taxes. It would really be funny if no one was suffereing even though most of them only should be blaming themselves.

21   Malcolm   2007 May 6, 3:03pm  

Hey Patrick, when Lereah's transition is complete you should set up a thread with the graphic being a picture of you standing on the carrier under the 'Mission Accomplished' sign.

22   Randy H   2007 May 6, 3:30pm  

Bap33

When I was in 5th grade and my dad lost his job in defense in Dayton, OH, I was on the school lunch program. I stayed on it until near the end of 6th grade. I was so embarrassed to be poor that I didn't eat lunch and borrowed half of my 2 best friend's lunches. I'm sorry to keep beating up on you, but sometimes your stereotypes are really offensive. Or maybe I should blame my dad for bad choices (not that I don't, but I believe everyone makes bad choices somewhere in life).

23   azrob   2007 May 6, 3:32pm  

all of these "help out the bad loans, don't ever admit they were bad loans" ideas are exactly what the japanese did after their bubble popped. Particulary to their corporate customers... Look how well that worked for Japan... Oh yeah, it lead to a 17 year slide in home prices... Actually homes outside of the bigger cities are cheaper then here, not on a square foot basis but still, who would have ever thought that?
I am kinda thinking of spending 6 months or so in some small japanese city one of these days...

24   Peter P   2007 May 6, 3:51pm  

What are you going to do now that the debate is dead?

We can always talk about sushi.

25   Malcolm   2007 May 6, 3:55pm  

Or what women want.

26   azrob   2007 May 6, 4:04pm  

I was on school lunch program from the day my dad died flying over vietnam, (3rd grade) until i left high school. My mother, who had stayed at home with the 3 children took a job working at walmart, and all of the kids worked after school. We didn't have a car so we all walked everywhere, even carrying all the groceries home as a family. I won a national merit scholarship, so college was more or less funded with that and some part time work. Later I won a national science foundation graduate fellowship and went to UC Berkeley.
Now I am worth way north of 1 million, and continue to live simply, except for my extensive travels. i ride my bike to my office, walk to local restaurants, and drive a hybrid (honda not prius though, and i drive the speedlimit randyH)
So you can stick your insults for school lunch programs etc, the taxes I have paid in my lifetime are several thousand times any assistance I received.

27   Jimbo   2007 May 6, 4:37pm  

I too, lived on food stamps, free lunch and free cheese, from the time my parents divorced, when I was ten, until I graduated high school at seventeen. My mom worked as a waitress part time and went to school full time to work on her Bachelors. Things got marginally better after my mother married by stepdad, but he had six kids of his own, and worked as a truck driver, so we were still pretty poor.

I got a lot of government help growing up: food stamps, housing assistance (both section 8 and "the projects"), free lunch, some welfare. Of course, I went to the public schools. Then I joined the Army and got the GI Bill money, which I don't really consider welfare, since I worked pretty hard for it, but it was still government assistance. Then I went to UC Berkeley, which is a taxpayer funded institution.

But I am sure that the taxes I have paid since I started working more than made up for all of it, with interest. I pay more each year in taxes these days than the cost of a year at Stanford.

28   e   2007 May 6, 6:08pm  

I pay more each year in taxes these days than the cost of a year at Stanford.

More than $32,994?

Youchers.

29   ozajh   2007 May 6, 10:28pm  

Now here's an interesting article.

Prime/Subprime mortgage percentages for all CA counties. (For 2005; an associated article notes they don't have full 2006 data yet.)

http://www.ocregister.com/ocregister/money/subprime/article_1681806.php

Would be even more interesting if they broke out Alt-A as well.

30   Randy H   2007 May 7, 12:10am  

Sorry Bap33

I've had it with your insults and narrow minded bigotry. As you can see here from other posters, many of us grew up poor, used various forms of government programs, and have ended up paying multiples more in our share of taxes and contributions to this country. For you to ignorantly blame the "bad decisions" of our parents is insulting. Should my father have known better than to specialize in defense? Who do you think builds the fighter jets for your beloved government's military Bap33 (actually he worked on air to air missile systems)? Should azrob's father have dodged service? I'm not even sure what your point is except to point a finger at kids eating school lunches as dirty welfare parasites. By the way, I may not have eaten the school lunches but my younger siblings did, for many years. But I'm sure Bap33 will enlighten me as to how my 6 year old baby brother was a welfare queen or something equally insulting.

31   DinOR   2007 May 7, 12:47am  

The "Department of Homeland Stupidity" at it again, eh?

Doing away with down payments altogether? Absolutely! WTFN? Pffftt.

Rumblings on the home front, and Mr. D is none too happy. The fellas were invited to the bridal shower (after the gals did their thing) and the in-laws are pecking away at me about the kids taking their "couldn't sell it all last summer McAlbatross" off their hands. After being unable to sell it ALL of last summer evidently unwilling to admit defeat, they rented it out for (I'm told) $900 a month. The kids would probably be paying twice that easily, and daughter #1 calls FIRST THING on Monday morning to assure my week starts out crappy.

I started out in a fairly "contained" fashion but after it was obvious the in-laws had fill't her up with visions of quick and easy wealth I had to act fast. I said (and I quote)

"You guys managed to buy THE ONE house in town that *wasn't* over priced! Now b/c the in-laws want to feed another alligator out at the beach they need to get out from under their current embarrassingly NEGATIVE cash flow property and they want YOU to take their place on the chopping block! Look, this is awkward for me (especially with only 7 weeks to the wedding) but you asked me, and I told you. DON'T DO IT!"

I'll be needing all of your support this week guys so please be patient with me. This would be the mistake of a lifetime and I feel the in-laws are leveraging my daughter's stability with her state job to get out from under a VERY BAD specuvestment. How DARE they! I'm sorry but she's the bread-winner (at least right now) and this is a TON of additional pressure they really don't need right now! They're barely making their bills as is, what are these people thinking?! It's 14 miles round trip in a very hilly area so it's hardly convenient. What could be MORE inconsiderate?

32   astrid   2007 May 7, 12:52am  

I was getting reduced priced meals (I think it was 15 or 20 cents) for my first 5 and a half years in America. It's pretty much a given when you're a grad student's kid in Oklahoma. If I was less oblivious, the stigma might have stinged more.

I think there should definitely be a health and education safety net, especially for children. Lots of families fall into hard times, that doesn't make them automatic welfare queens. As for the chronic welfare cases - I would suggest removing the incentives to start and reduce their breeding rate.

33   astrid   2007 May 7, 12:56am  

But if we really want to talk about real welfare queens, let's talk about farm subsidies and ethanol.

34   DinOR   2007 May 7, 1:03am  

If they'd have spent a DIME less they would've been in a mobile home! The next entry point is at least 50K higher and would have about 1/3 to 1/2 the lot size. Even in rural OR it's hard to find anything livable (believe it or not) for under 300k. At 197k they did just fine but now for their own greed the in-laws want to e'f that up b/c it suits "their" needs. Sorry, I'm puttin' my foot down on this one.

35   DinOR   2007 May 7, 1:12am  

Can't you just see this coming? "Gee dad, the lawn tractor needs more to repair it than it's worth so we could use a "little" help. Well... how much is a NEW lawnmower? Well only around _____ but we were thinking _____ b/c we were "behind" on some other bills too. We'd pay you b_a_c_k.....?

Huh-uh. NO. Sorry.

And of course the in-laws know that b/c it was "such a great deal" and such a great "investment" there's NFW the kids could come to THEM for money! So we would wind up subsidizing their lifestyle for oh.... the next 10-15 years? I don't think so.

36   astrid   2007 May 7, 1:13am  

DinOR,

Sorry to hear about your future in-law troubles. I hope your daughter already knows better.

If the in-laws were hoping for a bailout from Mr. D. Well, I hope they brought reading materials. Why would newlyweds need a big house anyways?

37   astrid   2007 May 7, 1:15am  

Do I hear a thread for no bid government contracts?

38   DinOR   2007 May 7, 1:19am  

astrid,

Well exactly! They DON'T need a big house and have no immediate plans for children so to what end is this serving? With a bubble price to boot (they bought it in '05) certainly not the kids. His folks are so far in denial it's really more like delusional. They couldn't sell it and had no choice to rent it....., but it would somehow be a "deal" for the kids? I'm beside myself.

Plus do you know what it takes to keep up a country place with acreage? Plenty, and it never ends.

39   Randy H   2007 May 7, 1:56am  

DinOR

Your dilemma is not to be envied. There are a lot of emotions working against you. It's tough enough to be faced with the possibility your future in-laws are less than scrupulous. But it's never that clear cut, is it? Assuming they're not professional hucksters, they probably _believe_ in their own minds they are doing a favor for the young couple. That's a very tough hurdle to overcome given that everyone would like to see a fairytale ending right now. How do you explain "yes, they *think* it's a good deal, but it's a terrible deal for everyone but them" without sounding like you're just trying to dance for rain on wedding day?

40   DinOR   2007 May 7, 1:57am  

justme,

Thank you. As it happens this is probably a more common scenario than we'd care to admit. Hell... it happened to me! Here I thought we were helping my folks out and all we did was inherit a mess. Big places=a lot of work.

There's no way these kids should be taking on that level of obligation in a downward trending market. Besides my son-in-law is just getting a sense of his place in the world and establishing his identity and purpose. I certainly don't want that defined by being a slave to your place. He needs to be making money, not dumping it into a black hole.

Comments 1 - 40 of 135       Last »     Search these comments

Please register to comment:

api   best comments   contact   latest images   memes   one year ago   random   suggestions