Friday, November 20, 2009

FHA Insanity Exposed in San Francisco

Great article in the New York Times exposing the insanity of FHA loan policies in San Francisco. [HT: Calculated Risk]

The first few paragraphs say it all:

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.”

We're also introduced to a rarity, a real estate agent thinking beyond their commisions and warning about these loans:

Even some San Francisco agents who are doing F.H.A. deals worry about the long-term consequences. Real estate commissions are 6 percent. If the value of a property were to hold steady, a seller who put down the F.H.A. minimum would suffer a loss after fees. And while the Bay Area has traditionally been an excellent investment, the last few years have proved a big exception.

“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?”

And finally, while I sound like a broken record saying these policies can't go on forever month after month, apparently a move is underway to do exactly that:

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.

His bill would make the new limits permanent.



  1. When I bought my first house in '96, it took YEARS to get ready. Had to save the down payment plus 6 months cash reserves in the bank. No credit card debt. I was 33, which was young to be buying a house in Marin.

    Now we have 20-somethings who were broke last year buying million dollar real estate in SF? And the taxpayers are on the hook for the FHA insuring these gambles, and millions others??

    I read the NYT article this morning, and I could hardly believe what I was reading. At least the headline called a spade a space, about the gov't trying to "prop up" prices.

    When this ends, who knows, but it sure as hell won't be pretty (or inexpensive).

  2. Thanks for highlighting this article, and for your kind words. I really hope they don't increase FHA loan limits. There are neighborhoods in SF like South of Market that continually have foreclosure/short sales happening. I look up the loan and it's usually something like 100% financing. The FHA should really scrutinize their borrowers.

    Great blog, by the way! I'll stop in often.

  3. You forgot to point out that the article says there are only 5 fha loans per week granted in SF, and almost zero given out until this year, which means we are talking about 60 loans in San Francisco for the year. So FHA loans account for 60 sales out of 3,394 sales this year to date in San Francisco. Hardly an amount that could cause a local SF real estate crisis.

  4. Sorry, my math was off. Its 270 FHA loans in SF for 2009, or 7.9% of all properties sold to date this year in SF.



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