San Antonio's Rockstar Turned Realtor®: FHA Loans To Become More Expensive For Home Buyers?

Matt - I also re-blogged Ken's post (a rarity for me).  I feel like this is yet another hurdle being placed in the way of any substantial housing recovery.  I'll check out your other post.

Jason - What bugs me the most about it all is that we (our government) need to make a decision - do we want to clear inventory and get the housing industry back on its feet or do we want to make homeownership more difficult at every turn.  I understand the need to be cautious that we don't get ourselves in another mortgage mess, but if we eliminate more people from qualifying for FHA loans, I don't think the coffers are going to get filled any faster either.

Matt - that was an awesome letter!! Very well written and you made some really great points!  I completely agree with you on pretty much everything!  The one that really gets under my skin is the lowering of the 6% cap on seller contributions.  Like you said - its the seller's money he can do what he wants with it - as long as the price has not been inflated!  AND just like you said that comes back to accurate appraisals! 

You have every right to be very proud of this one and I am sure you will get lots of feedback from it!

Here, here!!

I've been advocating this solution to the depleated fund for ages. 

In fact, the government could actually use some of it's classic governmentspeak and just refer to the a higher insurance premium as a "return to the premium charged before we reduced it".

That is how they plan to raise income taxes, isn't it??  Let the Bush tax reductions expire?? 

I can recall when the MIP was 2.75% up front.  Shucks, if they went to 2%, we'd be on the way to recovery.

The only reason I can imagine that the administration doesn't use this simply remedy is because they have the long term plan of making us a country of renters.  I just cannot figure out why.

Great post.  Ken is right on target and this info needs to be circulated.

Thanks for the great post today .   I liked it.

Patricia/Seacoast NH

Jeanna - Strong appraisals are definitely a cornerstone of the real estate market conditions.  If the appraisers all do their jobs in their local areas where they know and understand the market and they are open to listening to ideas from agents about why a particular home is worth more or less (notice I said open to listening to ideas from and not in cahoots with), I think the appraisal problems could be solved.  The way it stands currently appraisers are afraid of their own ghosts because they have shouldered a lot of the blame in all of this.  And thanks to the HVCC, many of them have thrown customer service and reasonable dialog out the window.

Lenn - You know what shocks me?  The federally mandated level of reserve is 2% for FHA.  They're currently at 0.53%.  That represents a 73.5% drop in their liquidity - wouldn't you start worrying long before that point?  When did that 1.47% disappear.  You know as well as I do how it disappeared (foreclosure statistics clearly support the drawing down of reserves), but why did we let it get this far, before starting to scramble for plans to fix it?  This combined with the fact that we extended and expanded the tax credit in order to get more homes sold and more buyers buying - this doesn't do that in any way, shape, or form - so are we just passing laws in order to counteract each other?  It seems so counterintuitive to let FHA change these guidelines while rallying around the flag of helping buyers and the housing industry as a whole.

Of course, I'm a realist, and know that the FHA needs cash in their reserves, so why not help fund it the easiest, most painless ways possible, instead of just throwing a bunch of new roadblocks in front of home buyers who you've been trying so hard to get back into the home buying game?

Patricia - C'mon you can give me a bit more that, can't you?  Let's talk about the issues.  What do you think?

Thanks for the lengthy update on information we started to get yesterday. This could be devastating news to first-timers.

Brother Matt...

The tide keeps going out, and I don't know if it will come back in or if a tsunami is on the way. It makes you wonder.

Aaron - Considering most of the people I've come in contact with that want to buy because of the First Time Home Buyer Tax Credit have fallen short of qualifying for an FHA loan (and in some cases, just barely fell short), I fear that any changes like this could be huge.

Brother Richard - Just break out your surfboard and prepare for one hell of a ride I guess.  I'm just really frustrated with the two-faced-ness of the idea of getting people back into the market, yet creating stumbling blocks along the way.  We need to go back to an era of banking that has a human side and a numbers side.  I recently rented a huge house out to a client that couldn't get a loan, yet their rent was astronomical (and they could have bought a huge house here in San Antonio with that kind of payment) - where does a bit of common sense come into play.  I might also add that they paid one year of rent up front and went into a two year lease.  Sounds pretty stable to me.  I just think we often have our hearts in the right place when we make changes, but we swing too far in one direction.  HVCC?  I understand why they wanted it and brought it into being, but the effects were not what they were after.  We spend too much time relying on mathematical equations to rationalize human behavior and because of that are forced to peg everyone into groups; whether it be by credit scores, cash available, first time home buyer,...we want to classify them, we want to analyze them, and we want to spit out an appropriate response.  No human element left it seems.

PS Whoever featured this post, thanks.  I know it's one of my wordy ramblings and often people just gloss over them, but this is one of those things that I really would love to hear opinions, dialog, and discussion on.  I'm sure there are plenty who disagree and plenty who agree - there's probably even a hybrid mix in there somewhere.

That was an awesome letter!  You had them hanging on your every word, until the bolded section. :)

'This sort of education program might actually bring more loans to your door, which in turn can increase the holdings of the FHA. With that money, some smart investing, and perhaps a bit of corporate downsizing of your own (your salaries and expenses for 2009 alone account for over $1.4 billion - we're making cuts where we can, perhaps you should too)?"

----

"so are we just passing laws in order to counteract each other?  It seems so counterintuitive to let FHA change these guidelines while rallying around the flag of helping buyers and the housing industry as a whole.

I agree it is counterintuitive at this time.  Lenders, gov't funded partners, appraisers, buyers and sellers, agents are all handcuffed to each other in this industry. You kick one down and we all fall down.

Matt - you make a remark about making home ownership more difficult at every turn.  Why is the market where it is now?  Because we made home ownership too easy.  There are those out in the world that do not have the knowledge or self control to own a home.  Just look at the individuals who purchased a home in say2002 and in 2006 went out and refinanced there home to take out their "earned equity" and bought BMW's, etc... where are those individuals now...  Driving a almost four year old car, probably with a $400/month payment and upside down in their home.  

Not everyone deserves a home.  If a first time home buyer cannot come up with 3.5% and a credit score of 620 they do not deserve it.  For a $200k home you need $7 down.  Have the sellers give $4k in concessions and they can get a rate of 5.0 and have all costs covered...  If that cannot be achieved they better continue to rent.  Wait, then they get their credit on next years taxes.  Be halfway good with money and you have a home.  

Wait until about five years from now when all the foreclosures hit.  There are going to be quite a few.  Remember FHA is the major loan of choice right now.

Wow. Great letter. I agree with your response to Lenn about why has it taken them a 1.54% decrease in reserves to realize there was a problem? Maybe at anywhere CLOSE to being at 2% someone should have taken a look and said, hmmmm, how do we fix this? At some point lenders were approving FHA loans with credit scores as low as 530. Everyone was irresponsible in giving loans. We have seen that take a 180 degree turn. We do not need to over correct. At that point, we will be at one loan fits all. 720 credit score, minimum 20% down, 3 months reserves. Where are those borrowers? Not in my town. Increase the MIP but with the ability to finance it. Not a bad idea to increase the down to 5%-it still can be a gift. Seller concessions should remain at 6%. Let's not take everyone out of the market. At that point, who cares about the $8000 tax credit? Can't get a loan it is worthless.

Matt, great point that if the risk goes up, payouts increase, then the insurance has to increase making the loans over time more expensive. Excellent economics lesson on this one.

Andi - When I did the research on their salaries and expenses for the year (they keep both numbers together for some reason, I would have preferred to see it separated into each category).

I like your picture of all us all falling down when one of us goes down.

Michael - I am by no means advocated a house for every person.  There are plenty of people that never will, never should, and never can own a house.  In fact, getting rid of that segment of the population would cause a whole other crisis - a serious crash in the investor market.  So I'm not foolish enough to think that easy loans and an air of "let everyone enjoy home ownership" helped get us to where we are today.

What I'm against here is the concept that we "want to help the housing industry" but we are putting up yet another roadblock to home ownership - which at this moment, is all that's going to help clear this inventory outside of bulldozing subdivisions we built in the heyday of real estate.

If you read the letter I wrote I agree that some of these are solutions, just not now.  A 3.5% down payment is low, I agreed to that in my letter.  But moving it now isn't the right time.  To make matters worse, where were these suggestions when we dipped below 2% reserves - these things do not happen over night (like the banks would like us to think).  In your own comment you talk about 3.5%, that's not the issue, the issue is the thought of raising that now.

I am by no means encouraging making home ownership easy, but I also see a need for us to stop pretending that we (the government) want to help clear this inventory, yet we want to make it more difficult to purchase a home.  No matter how you slice it; raised the minimum down payment, charging more mortgage insurance premiums (upfront or monthly), changing allowable seller contributions and making them lower, and establishing higher minimum credit scores - all of these things individually or as a complete package will decrease the available pool of buyers.  Less buyers equals less houses sold, high inventory drives prices down further, which sends more people underwater, which leads to more foreclosures.  It's a cycle we need to break, even if it hurts a bit.  Either direction we go it's going to hurt, let's just figure out where we'd rather take the pain.

Russ - I think we'll continue to see foreclosures be an issue for quite some time.  We allowed ourselves to dig deep holes and reversing that trend is never easy.  Human psychology is tough to break.

This is an excellent post. I love Lenn's reply about making us a country of "renters."

Matt, the cure for the housing crisis is lower home prices.    House prices got way ahead of wages and now it has to get back in line with what people can actually afford.  Easy lending standards created this mess and easy lending standards aren't going to get us out of this mess.

We are getting back to the old lending standards and the price of homes will adjust accordingly.  Then when incomes start to rise, we'll see house prices start to rise again.  We need to get back to the time when people actually had a chance to pay off their morgage and not have mortgage payments for the rest of their lives.  Then people would actually own something.  Is having a mortgage payment that never ends that much different than renting? 

Knee jerk reaction to the problems... And they just keep jerking that knee

Hi Matt -- I hope logic and common sense prevail, I doubt it, but I hope HUD doesn't drive 60mph in reverse looking in the rear-view mirror.

Matt - I remember reading a blog post from Lenn some time back about how the reserve was decreasing yet nobody was doing anything - well it didn't take long to get this low. It's horrifying to think how quickly it got to this - oops, ok, now we need to address the issue as we are too late! ~Rita

Matt - I believe FHA was running out of money back in the early 90's and raised the upfront premium to 3.8% with no monthly premium.  They allowed this premium to be built into the mortgage loan and this turned around their finances very quickly.  It was then lowered to 3% upfront with a small monthly premium paid and over the years has been adjusted again.  In none of these cases did they ask the borrower to pay the upfront premium out of pocket.  You are correct in your assertion that this will drastically reduce the amount of business that FHA does if even this one change is made.  There is nothing wrong with raising the premium if FHA needs more money in its coffers but they should not require that it be paid out of pocket.

Stephanie - I've had the pleasure of having a decent bank account once in myself.  It was pretty full of money and I was living very well.  As the business shifted (I wasn't in real estate at the time), my bank acount began to shrink.  I was making less and still spending the same on basics (I didn't lead an extravegent lifestyle by any means).  I didn't wake up one morning and say "uh oh, my account is nearly empty" - I saw the downward trend and looked for immediate solutions.  I found it in my house.  I lived in CA so I was spending a lot of money for a starter home.  Recognizing the problem, I came up with a solution - sell the house.  Why is it that everyone else seems to wake up one day and say "oh, I forgot to mention, we're broke?"  The big banks did when they began to collapse and now FHA is doing it too.  These are people that spend fortunes on tracking data and analyzing data - looking for trends to base future projections on.  Seems awfully weird that they just now are talking about it.  The last bit of your comment is exactly what I'm frustrated by - "At that point, who cares about the $8000 tax credit? Can't get a loan it is worthless."  All the incentives in the world will not change the fact that some buyers will be pushed out of the market.  Less buyers equals less funds to draw from for the FHA.

Matt, great point that if the risk goes up, payouts increase, then the insurance has to increase making the loans over time more expensive. Excellent economics lesson on this one.

Gary - Add to this a smaller pool of buyers if they were to raise the cash in hand requirements (whether through down payement, seller contributions being lessened, or requiring the upfront mortgage insurance premium be actually paid at closing and not allowing it to be rolled into your financing) and you have a higher price point for the insurance.  I'm not an economics whiz (and I have problems with some of the tenets of economics 101), but this is simple math.  More costs up front = less buyers.  Less buyers = smaller pool of people getting FHA loans.  Less FHA loans written = more insurance premiums lost.  Less mortgage insurance premiums = more money needed in FHA reserves.  The whole things leads to much higher need for more reserves.  So they'll pass that onto the consumers that are left.  Spread it out over more people and the effect will be less on them, but still have an impact on FHA reserves.

Greg - Lenn is always good for sharing her true opinion.  Never one to mince words either.

Tim - Although I do agree with you on home prices, I live in an area where the home prices are already pretty good, so the idea of home prices dipping much further isn't much of a good thing.  I agree that the housing market needed a slap in the face and a nice correction (as I said before, I used to live in Los Angeles).  You mention people being able to pay off their mortgage - that's a decision they have to make.  They don't have to pull the equity out of their home (and a lot of people probably wish they hadn't).  They never had to borrow against it or take out lines of credit.  A 30 year mortgage is just that - you have 30 years to pay it off.  I'll be paying mine when I'm an old man (if I stay in this home forever), but I will be able to pay it off as I don't use my home like an ATM.  And if they don't think they can cut it in 30 years, they can always look at a 15 year loan.  It's up to them.  And it's up to lenders and agents to show them the whys and hows.  We all preach better education for clients, but what was everyone doing in the run up to all of this.  I wasn't a real estate agent yet, but I would bet some people said to themselves "this loan is a bad idea," but let people take it anyway.  Where does that responsibility fall?  I saw on all three parties - buyer, lender, and agent.

Tom - Great way to put it.  Who woke up and said "I guess we ought to do something and do it fast" at the beginning of the month?  Why didn't they do it before?

Rita - I remember Lenn talking about it as well.  She's been quite vocal about FHA for sometime now (I just went back and scrolled a few posts that were about FHA).  The sudden alarm ringing and panic button pushing are what  truly concern me.  Perhaps they did it on purpose to set themselves up for their own bailout.  Even if all the changes were put into place tomorrow, I wonder if it would really solve the problem quick enough.

Philip - That's an interesting look at it from a historical perspective.  I think the key is to keep it so that we're not requiring more cash to the table.  Not yet.  I have no problem with adjusting the FHA rules down the road and raising things here and there to correct some of the issues, but in the position we're in, we need to keep cash in the buyer's pockets as much as possible.  If a borrower knew they had to bring an extra $1,000 to the table, what would they do?  Jobs are scarce, people are scared - do you risk that $1,000 now or continue to live right where you are (smaller home, rental, your parent's house, etc.)?  That's the ultimate question that only each individual consumer knows, but my guess is many of them would cling to that $1,000 for fear that they might need it next week.

To no one in particular - To be clear, I'm not advocating cutting or slashing any of the current standing FHA quidelines.  In fact, I agree they need to be changed (to the benefit of FHA).  What I'm advocating though is a solution for the here and now without killing off buyers and making it harder for them to obtain financing.  When that last sentence is read, it is not meant to be taken as "free homes for everyone" or even that I think it should be easy as pie to acquire a house.  A house is a big commitment and requires serious thought.  They're not for everyone and although they're great to own, they also can be a nightmare to own.  There are many hidden costs in owning a home - things no one thinks about until they happen to them.  I'm sure even the most prepared (ie plenty of cash reserves) people are surprised at sudden costs of a home when a large system fails or needs replaced/repaired.

I don't base my opinions on my business either.  I'm not advocating keeping more buyers around so that I can keep making money.  Will I?  Sure hope so and I will do what it takes to continue making money and succeeding, but that is not my first concern.  I am trying to find a logical way to help FHA and buyers.  I think the levels everything is at now are working, asking anyone to bring more cash to closing will not.  I'm frustrated by the dual opinions being expressed by our government with these things - help the buyers out there (tax credit, $100 down payment on certain HUD homes, etc.) and hurt them (new propsals to changes in FHA).

At the end of the day, a lot of it will be "wait and see."  In the meantime, I'll keep discussing issues like this looking for rational answers (which will probably never get used).

In my letter, I mentioned that we need to educate the public more about FHA as some people still think it's for "poor people" or "lower credit scores" - my own family were shockd to learn what I knew about FHA loans, as they thought these exact things.  And my dad worked in the banking loan industry for years!  A new website might help too - the HUD site is garrish and today's consumer is not going to stay there long.  I hate going there for research, how do you think a consumer would view it?  Poorly I suspect.

Matt - I just put on my "to do" list to read your letter.  It is great that you are on the forefront of this issue and brining more attention to it.  ~ Chris

Chris - I'd love to hear your reaction to it.  I just thought it was something that doesn't make sense and could hold us back from truly bringing the housing market back to a normalized place.  Not to say that's going to happen overnight, but I do think we're getting there...slowly but surely.

Matt, I agree, this is a problem that needs solved but this is the WRONG time to do it.  I did a post about this on my blog the other day, a little less eloquent than yours, where I stated my opinion that not only is this bad timing and will hurt housing, it outright contradicts the  government logic that buyers should have access to the monetized tax credit.  How can we give them free tax payer money and then say that they need more skin in the game?

Jason - I'm making this a link to your post so everyone can check it out.  I think it was an excellent post full of the same thought processes that I had.  Your best line?  "Look at your bank statement and tell me I'm wrong."  That's exactly my point.  Find me someone that hasn't been affected in some way by everything in the past couple of years.  The contradiction of these actions is not lost on me at all.  This is definitely a timing issue and I think there are some solutions, but not all of these make good financial sense right now (take a look at your math in your post for proof of that).

Thank you Matt, I appreciate the link although that wasn't my intent.  It never ceases to amaze me how dosconnected the Govt policy makers are from one another.  Maybe if they actually worked out a cohesive plan together, they'd actually get something done in a way that makes sense. 

Jason - No problem on the link.  I was going to email you and tell you to add it to your comment, but figured this would be easier.  I didn't think it was your intent, but so you know, I like links in the comment section as long as they are relevant to the topic and aren't just a weiled attempt to say "hey, look at me, over here!"  There does seem to be a disconnect between so many different operations that one would think maybe someday we'd see it clearly and work together.  I fear that day may never come.

Matt, I thought the same thing when I read it.

What?

It is harder even now for young folks to save, now this?

Maybe they want everyone to rent all the homes not selling. I know in Ann Arbor our rental inventory is just going up. I looked at the MLS hot sheet one day this past week and every new listing was a rental.

See my posting on Agent Genius http://agentgenius.com/real-estate-mortgage-economy/mortgage/its-unofficial-no-more-fannie-or-freddie/

I think the FHA MIP will have to go up.

I've heard of FHA being referred to as a sub-prime lender - they will generally lend to anyone with a pulse.  Even with all the pressures of lending based on a minimum FICO score - the states and federal government all have programs to get first time home buyers that no one else will finance into a home.  The 3 or 3.5% initial down payment is way too low and we will continue to see unqualified buyers taking possession of homes (and subsequently losing them) because the barriers to entry in home ownership were set so low by FHA.

FHA, The new sub prime.

Great post. As an FHA lender for the last 10+ years, here is my 2 cents. FHA has already increased the UFMIP and the monthly percentages that it collects from borrowers. I don't see the need for them to increase it anymore. There will be a point of diminshing return if they raise it and fewer people qualify for their home purchase. Incidentally, it is my understanding that FHA has additional accounts that are "over-funded" which more than elevate their reserves above the 2% congressionally mandated level. I don't believe that they are too concerned at this point.

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O.K., rock star. You asked and I am not too shy to tell you what I think. The FHA (government backed loans) have been, over the past two years, the loan of choice because of the down payment and credit requirements. It has not been, for me, the tax credit give aways that has sold houses. The minimum of a 625 credit score is real life for many hardworking honest people today. A down payment of 3.5% when the buyer could rent for less than the mortgage amount is real life affordability today. And, yes, to ask for the seller to help with closing costs is reasonable in today's market.

Currently, the banks control the market. They can and do release homes to the market at a price that forces the home owners to accept as the new value after years of silly Zillow estimates for the neighborhood. But, the NAR and their lobbyists have begged Uncle Sam to offer a tax credit to present a false value of the homes to both buyers and sellers. This has created an unwillingness of the general public to understand the amount the home had been over valued. Why were they over valued? Well, thank the banks and the Federal government that had in place an artificially low interest rate. We could demand that the banks flood the market with the foreclosures that they have in their own inventory, but I would guess that such a move would bring a home being marketed for $200,000 down to the reality of true value - about $150,000.

Why does the FHA have a disproportionate amount on their books now? Because the banks want them to carry the risk and will not loan the money out any other way. Show me the 25 and 30 year olds that have saved 20% of a $250,000 home. Gifts from parents, who have tapped into their own home equity, so they can buy a new car, are hard to come by for kids today. When the fact that the average income does not meet the necessary guidelines to buy the average house in the MLS inventory, to whom shall we sell the houses? We can only hope inflation kicks in and the American public will some how earn enough to justify the expense of owning a home.

While a new car loan can last up to seven years, banks have refused to market and sell mortgages for the home beyond the standard 30 year fixed. Have the banks give back the bail out money and put it into the FHA. Banks are not too big to fail, the FHA is.

Now that I have let off my steam, I should delete and post a point by point rebuttal blog of my own. But, I am too crazed to do any more writting on the subject.

Nice post by the way.

Matt,

Many believe that FHA loans are much better now with the higher credit scores and no seller funded DPA loans going into the pool. I think FHA will remain solvent. They are not looking at the whole picture.... And the Capital Reserve Account decline is a result of he older loans.... not today's more prudent loans.

Who hires these people?

We have loans in the pool with seller funded down payment and 6% closing costs help..... then add 1.75% upfront insurance to the balance of the loan..... <= You just allowed someone to buy too much house.

Get rid of the 1.75% and raise the monthly premiums. Stop allowing FHA borrowers with bad credit keep up with the Joneses.

Matt, your letter was very well written, and makes a lot of sense.  I would be curious to read the reply from Shaun Donovan, should it ever come.

Matt, I think what your very thoughtful letter points out is this. Every time the government tweaks something, even if it desperately needs tweaking, there are many unintended consequences that they seemingly never considered. You would think with the multitudes of economists and other so called experts at work in Washington that they would have all their bases covered. And maybe they do, but maybe political considerations end up trumping cold, hard reality....I hope that's not the case but I suspect it usually is. Hopefully they'll make a series of wise decisions that will solve this problem while causing the least amount of pain, that's my hope but not necessarily my expectation. 

Rather than make all those changes why not just raise the premium on the MI in accordance with the low down or the lower credit score.  I personally would like FHA to do away with DTI and go back to a proven ability to pay.  This would not be a Stated Income situation, but could help some of us that need a Stated Income loan.

Great post.. I just wonder if we will have a wave of FHA defaults few years from now. 

Raise the premiums in areas where you have the most defaults. Limit your risk by raising the score and have the downpayment go up on a sliding scale as your scores go down. This would knock some people out of the market but the system would be more solid.

If Nevada default more then they pay more on Insurance. In Louisiana we pay 2-3 times more on homeowners because of Hurricanes. We however may have less defaults since people are more conservative here. Give us a break. Its called Risk assessment.

Do not hurt the 720 score as they are more likely to pay. Also look at assets and the ability to pay if something goes wrong. One size does not fit all.  

I like Gregory's post/comment. I am heading over to read your article, will come back after~

I read your article and agree that FHA must remain solvent. As for how, I like the options laid out by eric above..sliding scale loans, whodathunk it? Rarely do I have sellers pay 6% anyway so that is not that big of a plus, in my area anyway...

This is not my understanding. Yes, the mortgage insurance is added to the buyers' loan. But it is sent directly to the FHA at closing. It is paid at closing just like all other closing costs.

The real problem with the FHA is they charge too much. I remember when there was no upfront MIP. The FHA only charged 1/2% premium monthly. The difference was that the money went into a designated kitty. (Much like Social Security originally was a separate trust fund.)  At that time, it was said that the FHA was the only government office that made a profit. When sellers defaulted on their loans, that money was spent to rehab the homes before they were put up for sale. Homes were painted, new carpeting installed and even garages were added to homes that previously didn't have one. Realtors competed for the sales in an unusual way. Balls with a number that corresponded with a number assigned to the purchase offer were put in a bottle. The bottle was shaken and a winner was drawn. Because the FHA was so successful, private mortgage companies got into the business to compete. These conventional loans had higher standards for debt ratios and the gravy loans were picked off leaving less desirable loans to the FHA. Then because the FHA began losing money, they closed their local offices and added upfront fees. This again made the private mortgage loans more competitive. Now with the upfront MIP added to the loans, the buyer in effect doesn't have a downpayment, but rather a 100% loan. Just another example of the government screwing up something that worked well.

Honestly, I think 3.5% down is just too low. That makes the buyer immediately underwater if he has to turn around and sell for some reason. 3.5% won't even cover the comission.  I'd rather see buyers have to come up with a decent amount for a down payment. Home prices would simply need to come down more if people can't get loans at their current prices.

As Jenny said, the minute an FHA buyer purchases a home they are underwater.  Add in the coming additional decline and they are even more in the hole.  I think the FHA should be abolished altogether.  The government needs to stop messing with the real estate market so that home prices can actually fall in line with peoples incomes.  This cannot happen when the government encourages unqualified people to buy homes they cannot afford.  Sorry, if you cannot scrape together at least 10% of the home's cost, you should not buy.  Your savings behavior is poor.  When you buy the home you will likely live on the edge and when the inevitable illness or job loss occurs you will be in default.

Matt,

I struggle with this issue.  My guy tells me that a TRUE recovery means not putting band-aids on the problem by inflating home ownership to people that possibly shouldn't be owning homes.  I sold homes to 2 people last year that were barely able to qualify for the FHA loan at 3% down payment.  They are now both behind on their payments...at least one of them, possibly both will probably lose their home in the next year and then we will have another foreclosure (HUD this time).

Wouldn't a true recovery be putting stable buyers into homes?  Minumum credit scores is a MUST. if we want these new home buyers to succeed they really should not be purchasing at a 50+% debt to income ratio.  Prices have come down so much, interest rates are sooo low, then there is the tax credit...do we really need to make it any easier?

In general I guess I favor strictor requirements.

We are dealing with the simple law of supply and demand here and a mess of gigantic proportions -

too many foreclosures = too many homes for sale = lower prices! How low will they go!!!

Lower prices will allow more people to buy and afford their payment but we have much more pain to suffer before the market gets back into balance.

And by the way who is losing all the money on these FHA loans?

Missy - I know you're a fiscally conservative kind of gal.  So when you think that, to me, it carries a bit of weight with it.  I just can't imagine that we want to create programs that help/hurt at the same time.  It doesn't make sense.

Fred - I did read your article over there.  For those that want easy access links to it, here's Fred's post "It’s Unofficial! No More Fannie or Freddie!"

Weichert and Brian - I think the slogans about FHA being the new sub-prime are just that.  I don't view FHA as the new sub-prime, but rather an excellent opportunity to those that can't fit into the conventional loans' standards (although other than some of the down payment requirements, they seem to be running very similarly these days - mostly because of investor pressure).  Could FHA be better?  Yes, of course it could.  We could use sweeping changes (which some of this has brought and I hope some of it sticks) to every little detail of the financial world.  My favorite recent one?  Tell credit cards they can't do a laundry list of items.  But give them until next to implement it.  Guess what the credit card companies did?  Went on a rampage of hiking rates, changing rules, and costing card holders a fortune.  Come next year, they won't do it anymore, because they were told to.  It's like telling a smack addict he has to stop next year.  Guess what he's going to do until then?

Britt - Interesting comment about the "other accounts."  I read something about that somewhere as well and wondered if perhaps this was part of the key to their survival.  Perhaps by keeping cash elsewhere and watching the reserve account drain, they are setting themselves up for an infusion of cash from Congress and the President.  Who wouldn't like some more cash?  I mentioned their $1.4 billion plus salary and expense for 2009, and yet I read in another article how under manned they were.  How can you spend that much money on employees and still be undermanned.  See all of you later, I'm off to get a job with the FHA.

Gregory - Excellent comment and I'm glad you made it.  FHA is a great program, especially for those just stepping out into the world of home ownership.  In my area, prices are pretty well adjusted to begin with (we didn't have a crazy over-valuation), but in some pockets there could be some more correction. We also have a lot of builder communities out here, which can make prices go up and down at the drop of the hat, depending on what the builder wants to do with their subdivision.  For instance this weekend, I know of a $180K+ home, that I can get the buyers $25K in allowances, make my commission off of, and get an additional $10K in my pocket.  That's over $30K in incentives to sell that home bringing the effective price down to $150K or so.  How does a resale home compete with that?  Sorry I got a bit off track there, but that shocks me too.

Tom - Good point about it not being today's loans, but yesterday's.  Of course, one of the things I've learned about life is that most people want to live in the here and now - especially when it comes to politics.  Promise it now, hope you can deliver someday.  I truly don't think FHA will disappear.  If I'm wrong, I'll eat my words, but I just can't see going to a system that supports only conventional loans.

Bob - Some how I doubt Secretary Donovan is out there googling his name.  It would be cool to hear from someone from FHA, HUD, the President, or Donovan though.  I'd even take a decent response from someone from Congress or a governor.  Any out there reading this?

Dave - I mentioned somewhere here or in the post on RErockstar.com (I've made so many reply comments that I'm getting the two mised up now) that I view the HVCC in a similar light.  The intention was right, the outcome was poor.  Most of the regulations have a good intention behind them.  Trying to correct this or that.  What government seems to forget are the side effects of the outcome.

Gene - Are you suggesting a floating mortgage insurance rate, such as the ones we use everywhere else based on risk?

Inez - It will interesting to see what today's actions bring tomorrow.  Perhaps I'll come back to this post someday and say "yep, I was right."  Perhaps someday I'll come back and say "what in the world was I thinking."  If only we could predict the future.

Eric - The "one size doesn't fit all" mantra has been said a few times here.  It's true.  I think we do need to look at a wide scope of things.  I remember when I bought this house, my old house came up on the lender's radar.  They asked, what happened here in these months.  I explained it to them (on paper of course) and they got what I was saying, understood and approved me for the loan.  It's all in how it's viewed.

Vanessa - Thanks for stopping by here and over at the actual letter.  Here in San Antonio we see a lot of buyers asking for high amounts of seller paid closing costs.  We also have very inexpensive housing compared to other parts of the country and earn less than some of the larger cities and areas (for instance Los Angeles).  That might be part of the difficulty here as well, since I look at it from a San Antonio perspective, while we have agents looking at it from their local market's persepctive.

Melissa - I'm a bit confused.  I didn't catch where anyone said that this money didn't go directly to FHA.  I would assume they do collect it right away, whether the lender pays them or the title company pays them - someone has to turn over that cash or FHA would be struggling even more so.  I'm a little confused by your next comment as it starts out with "they charge to much" and ends with them giving out "100% loans" (based on the roll in of the mortgage insurance premium.

Jenny and James - As I said in the letter, I'm willing to accept that 3.5% is too low.  However, I don't think that raising that bar today is the solution.  I'm also not a fan of "homes for everyone" style ideas either, so please don't mistake my encouragement of HUD to not do this as I sign that I think this way.  Based on your comments (and others), I fear that maybe we (Realtors®) are guilty of what we accuse the government of doing (swinging to far in anyone direction and overcompensating for problems).  How homes did you sell with FHA financing at 3.5% that went bad?  How many did you sell that didn't?  Just because some people default, doesn't the rest will.  I'm working on gathering some statistics about this, so hopefully I can write a post about that.

Tiffany - I don't put a ton of weight on credit scores being higher for a simple reason.  Going into the housing market boom, I'd be willing to bet that there some of those that had excellent credit that aren't looking like great borrowers based on their credit now.  Credit scores flucuate with the times.  Sure there are still plenty of super credit worthy buyers out there, but not all of them look good on paper, but make sense as a good quality loan.

I don't think it's all that easy to buy in today's market even.  We've given a lot of incentive to buy (tax credit, low interest rates, availability of inventory), yet I still see plenty of people being turned down or not able to act on purchases with today's lending requirements.  The tax credit doesn't make it easier to buy a home, it just makes it a good option.  Lower interest rates only make it easier to borrow more money, but it still doesn't get you approved for a loan any quicker.

Michael - I have my own theories on supply and demand, but that's a whole other blog post.  I do think there is a demand out there, but for various reasons, people just aren't reacting as they used to to their own personal demand.  I liken it to last year's Christmas spending.  I couldn't go into a store without bumping elbows every five seconds - the demand was there, but people were being cautious with their spending.  Same goes for housing.  I have several ready, willing, and able buyers out there right now...but they're still being cautious.  Looking for what's best for them.  The last couple of years have trained a lot of consumers to be a bit more savvy with their purchases (and who could blame them?).  In my area, San Antonio, we're not quite as affected by all the foreclosures (yes we do have them and in larger amounts than normal, but we're no CA, FL, or NV) and our home prices are very affordable.  I live in a great house that I paid $135,000 for in 2006.  In PA where I moved from, this same house (at that time) would have easily cost me $220,000 or more.  We looked at houses that would have cost us about $30K more than we spent and we were looking at 100 year old duplexes with dirt basements that need major repairs.  Part of the reason we left PA and came down here.

By the way, I wanted to thank everyone for checking out this post.  The clicks vs. views are absolutely incredible.

In case you can't read the numbers, they are Views: 2670 and Clicks: 2545.

That means that 95.3% of people who saw the post actually clicked on it to read it.  I have never had that high of a percentage on a clicks vs. views analysis.  So thanks for taking the time to click on it and read it.  And that doesn't even include the traffic to the original post at RErockstar.  It's obvious to me that this is a hot issue at the moment if this is the kind of response and traffic it is generating.

For anybody who has been in this industry for a while, it should be remembered that home loans have come full circle to where they were prior to 2000.

In the 90's, 80's . . . FHA was the loan product of choice for most homebuyers. The attraction was always the low down payment.  Most people bought at their credit limit.  They had good income, but not much in savings.  Coming up with 20% down payment was pretty much impossible for most homebuyers, then as it is now.  Enter the 80/10/10, the 80/15/5 and the one everyone loved "the 80/20!"  The initial popularity of these loan products was not because they were easy to get.  They were popular because the borrower could deduct (IRS) the interest expense of the secondary financing.  At that time the FHA MIP as well as conventional MIP (PMI) could not, so it was "flushed" money.

We all know that from 1999 - to 2007, origination of FHA and VA loans were at record lows.  Other loans were easier to get, "cheaper!" and tax deductable.

While I would not characterize FHA loans to be the "new sub-prime," as many have done, it has risen to the occasion to be the loan of choice for nearly "everyone."  Buyers, AND more noteworthy The Banks.

While the Banks struggle to repair their balance sheets, FHA and VA are about the only loans for which the lenders have an appetite.  They want their loans insured or guaranteed by the Government so there is no "risk" to the bank.  As private MI companies have fallen on hard-times or disappeared entirely, the banks are just not comfortable with making a loan that is other than Government Insured or Guaranteed."

So, side-stepping around the causes of the real estate and loan crisis, we are nonetheless back to FHA and VA as "the" preferred loan product.

We've beat everyone else to death (journalistically), so why not go for HUD and the FHA?  "Last lender program  standing!"  Should be an easy target, right?  Especially if all of the pesky facts don't have to be checked.  Heck, if Congress can do it, why can't we!

So where are FHA's finances?  Well actually they are fine.  (the blogosphere is sensational, but it is wrong)  HUD has sufficient funds to back and pay claims.  Operating funds have been and are more than sufficient.  This blog and re-blog is not the "budgetary, operating fund account" but the reserve fund.  What is the topic of discussion is that HUD's"reserve fund" has diminished in relationship to the amount of loans being insured.  The reserve fund has been tapped, it is strictly a percentage/ratio issue.  The reserve fund did NOT go down, the number of loans has increased so the ratio has been thrown off.   Should it be fixed? Maybe!  Are they in trouble? No!

The actual facts are that FHA paid out $10-billion in claims over the last year.  HUD's internal forecast for FY 2010 is that they will pay out approximately $15-billion (30% increase) in claims, which they can do without any need to tap into "reserve funds."  This is not reflective of a mis-managed agency or lax rules, it is reflective of the increased utilization of FHA loans as the predominant loan of choice for the entire industry.

What I would prefer to see the conversation and debate turn to is the topic of market stabilization.  Until we see solidly stabilized market prices, all lenders, and insurers/guarantors will see increased risk and losses.

Increasing down payments, changing borrower qualification, etc. are measures that reflect "political damage control."  Good or mis-guided, it doesn't matter.  If FHA loans become harder and harder to get, for whatever reason, the delicate balance will be altered again and we will definitely see another "leg-down" in market demand, real estate values, and consequently in the asset base of "ALL" financial institutions.  Melt-down II, the sequel (promises to be bigger and better than the original!)

I would also caution those who continue to spew political rhetoric about FHA sponsoring unqualified or dead-beat borrowers.  Wake up and smell the coffee!  The sub-prime, NINJA borrowers are long "gone."  We are now dealing with collateral damage.  Anyone who bought or refinanced in the last 5-6 years has "no margin for error."  Job loss, divorce, illness, relocation, death of spouse, etc, etc, etc. forces people into having to deal with being upside-down in their home equity, and insolvent.

Every single one of the defaults, short sales, foreclosures and bankruptcies are "people."  People, families, children and communities are being ripped apart financially and emotionally but the ravages of the economic situation.  Shame on anyone who dares to allude that they somehow deserve it.  Shame on them!  May a curse and a pox come upon them.

Anybody who thinks this market will stabilize without ready access to credit facilities, is simply unknowledgeable and would serve themselves and the community by remaining silent on things about which they know nothing.

matt, couldn't read your letter cause the link would not work. but as for fha, back in 2000ish, fha lowered its upfront premium from 2.25% to 1.5% because they had a $16billion dollar surplus. the economy was doing much better then, in spite of the dot com bubble bursting about a year earlier. unemployment was low, and the hoising market was doing much better than it is today. now that fha is doing most of the heavy lifting, its only natural that its default rate is gonna go up. they have become victims of circumstance. fha has worked well for many years. they are a changin' with the times, but we need to focus on the economy and getting people back to work. fix that, and everything else will follow.

I feel like a one trip pony by repeating the same old line - we need to let the market hit bottom. No more artificial tax credit schemes or bank bailouts. We also need to tighten up underwriting criteria and that includes FHA which has become the new sub-prime. Those who fail to study history are prone to repeat the mistakes of the past. That is what we are doing. 20% used to be the standard downpayment requirement. 

I'm so glad you brought this subject up because FHA loans were the big topic in the short sales class last week and how much of a premium gets paid to the lender in foreclosure. 

Hello, Matt and Andi Grant (post #13):

"...and perhaps a bit of corporate downsizing of your own (your salaries and expenses for 2009 alone account for over $1.4 billion - we're making cuts where we can, perhaps you should too)?"

Are you suggesting that throwing another bunch of working stiffs out of work is the solution to the housing crisis, the unemployment crisis, the other crises that are city-wide, country-wide, even world-wide? I don't think so. There has got to be a better way.

See, using the government as an employer of last resort can work. It doesn't work if you use the communistic approach (as Russia did for about 60 years, as China tried before they slipped into a form of capitalism)-- but it is a good use of taxing power to level out some of the bumps that private industry cannot level.

You may say that way is the way to socialism. I don't think that is so , either. Check the New Deal, the WPA, the TVA project that helped pull the country and the world out of the mud after the Great Depression of the first half of the 20th century. If those were socialistic programs, the did not infect the country.

And I will bet  that the highest salary paid by the FHA is a mere hair on the wart on the frog of the salaries paid to some of the employees of companies such as AIG, Bank of America, etc.

But even so, I agree with the other 99% of your post. Thanks!!

Verry interesting and well written post.  I would like to take a different look at this though.  remember back in the 80's when insurance companies would charge more to insure white, black and red cars?  It was because they were in more accidents, well, that is because there were more of them on the road as they were the most popular colors.

Now that FHA is the most common loan, it is under the same scrutiney.  The propossed changes by HUD will not make much difference in the quality of loans.  Here are my points of contention:

Raise the down payment from 3.5% to 5%.  Two reasons this will not help, 1st, most of the down payments are gifts so the buyer still does not have skin in the game.  Grandma will just be out more money.   2nd, if I buy a house for $200,000 and have to put down $10,000 instead of $7000, it will lower may payment by about $17 a month.  If some thing happens next month, I have less money in reserves to cover the expense.  The $17 difference in payment is not going to help me stay in the house.

Establish a minimum credit score.  Although FHA does not have a minimum credit score, all of the lenders do, most are at 620 and moving up to 640.  Some are even at 660.  The score is not the issue as much as the review of credit.  If I am a 640 borrower because I had 3 late payments last month and you are a 640 because you had lost your job 2 years ago, who is the better candidate for a mortgage?  This is what FHA underwriting has brought to the table that subprime did not (FHA is NOT subprime lending).  Remember when a 580 FICO could get 100% financing?

Raise mortgage insurance premiums.  I would be okay with them raising the upfront premiums, as long as they can be rolled into the loan.  If they are rolled into the loan, then HUD gets the premium as soon as the loan funds.  The monthly premium is only paid if the customer makes the payment, think about it.

Lower seller concessions.  Why?  This would hurt the seller not the buyer.  In this market, the sellers need as many incentives to intice buyers as possible.  Why give an $8000 or $6500 incentive to a buyer and then limit the sellers ability to sell thier home?  Also, the buyer paying more money is not necessarily going to keep them in the house.  See the Down Payment issue above.

End rolling in the upfront premium?  Again, as mentioned above, HUD gets these funds at COE.  Just more upfront money from the buyers.

If all of these rules are enacted the buyer would now need 5% down, at least 1.5% for closing and an upfront MI, based on rolling back the MI premium to 2.25%, the buyer would need 8.75% to get into a home.  on a $200,000 purchase, the buyer would be required to bring in $17,500, opposed to $7000.  The difference in payment would be less than $50 a month. 

In my oppinion, it would make more sense for the buyers to have reserves for when emergencies do come up. 

The problem is not the mortgage or financing.  The problem is unemployment, drops in income and deflated home values as a result of unemployment, drops in income and tough credit criteria. 

If someone loses thier job, or in many of our casses, our income drops and I can not afford the house, it will not matter how much I put down.  It will not matter how much of the closing costs I paid and it will not matter how much MI I am paying, I will not be able to pay for the house.

What inventory? I would love to help clear inventory and get the housing industry back on its feet.

I am in one of the hardest hit areas and we have lots buyers and very little inventory.

Due to the lack of inventory Seller's are no longer paying incentives of any type on most homes. A buyer is one of 3 to 73 people who wants to purchase any given decent home nowadays. If they want a nice home they will pay their own closing costs and pay a minimum of $10,000 over appraised value.

If they would put 500 homes on the market today they would all be sold within a week. We can't sell it if it's not available. Vacant homes are all over town and some families are living in their homes for a year or more after they made their last payment. We know the homes are there but they wont release them. That's the problem. Put the homes on the market so we can will clear the inventory.

I am all for raising the minimum credit score limit for FHA loans!

Clay - You should make your comment a blog post of your own.  Well detailed and thought out.  Of note, in discussing the funds situation of FHA...I'm not trying to sensationalize the issue, FHA is the one who stood before the committee and gave them the numbers and starting floating ideas.  If you want my more sensational approach, I think what they're trying to do is set themselves up to be the loan source.  Don't you think they have a desire to see conventional be marginalized?  They are at the end of the day in the business of making money, I would be shocked to find out that they weren't hoping all the recent problems help them increase their market share.

Wholesale Mortgage Services - I definitely agree.  They need to increase employment to get people back to to having cash to buy the homes.  But in terms of the housing market "as is" I don't feel it's a good idea to eliminate any borrowers today.

Anonymous - While I agree that we need to stop incentivizing every little action we make in the housing world (I wanted to tax credit to be over with), I don't think shifting it the opposite way is the best idea at the moment either.  I'll be writing a post about defaults and foreclosures pretty soon and I think the facts will speak for themselves.

Sandy - Here in San Antonio FHA is king it seems (well next to VA as we have a large military presence here).  Strangely enough, most of my buyers have used conventional financing, but all of my sellers homes have been bought with FHA financing.

I'll be back later...

Denver - Perhaps I should have been a little more precise with my words there.  Actually, while researching the first post, I found some numbers (wish I had them in front of me now) about how many people were employed for various functions at FHA.  They were shockingly low for the numbers of loans they're dealing with.  What I do question is where all that money gets spent (once I saw some of the employment numbers for FHA).  It's no secret to anyone that government spending is often misguided and wasteful - in any administration.  I just wonder what they spend that much on every year.  Of course, I've never been the head of the FHA either, so I probably don't know half of what they do in their day to day business.

The one thing that does concern me is seeing it listed as "salaries and expenses" - this many be common in corporate budgets, I don't know, but mixing those two seems awfully misleading on the numbers.  Who's to say that salaries aren't 25% and expenses 75% of that 1.4 billion.  I'm sure they break it down somewhere in their budgeting, but I just didn't see it and that seems like it would be an easy place for a lot of money to be misused or wasted.

Matt-

Should be interesting to see how this plays out with FHA.  FYI, FHA loans are the dominant loan programs in our market in St Louis.  Over 70% of sales are below $300K price point with $291,250 the price limit for FHA.