Friday, November 13, 2009

FHA Takes Another Step Towards Blowing Up

Real estate agents love FHA loans. These 3.5% down payment loans have kept the housing market on life support and allowed them to keep collecting commissions over the last few years. Of course, taxpayers are ultimately responsible for picking up the bill if the housing market continues to collapse and default rates rise. It looks as if that day is nearing.

Today, news is out via WSJ reporter Nick Timiraos that the FHA's reserves are far below their legal limit. Take a look at the graph to the left. Notice that over 15% of loans originated in 2008 are already 60 days delinquent. More losses are surely coming and taxpayers will be picking up the bill.

One of the tipping points for sending the housing market into another tailspin will be the removal of government support from the market (90% of new mortgage loans are currently insured by the federal government). A key driver in this change coming about will be public backlash against the FHA once taxpayers realize they are on the hook for the losses.

At that point expect the minimum down payments to increase (something real estate agents are fighting against vehemently). When people have to start putting 5% or, dare we say, 10% down expect housing to take another step down across the board. Looking at the abysmal state of the FHA presented in the graphs from the WSJ, I'd say that day is closer than most expect.


  1. But even if the down payment goes to 5% (the horror!), buyers can still offset with the fed buyer's credit, which goes through April 2010. So we're still looking at zero down mortgages for the next few months.

    And with mid-term elections next year, I'm sure the buyer's credit will be extended yet again. Also expect the Fed's continuation of their MBS purchases beyond March 2010. There's no way the gov't will withdraw support during the "all important" Spring buying season. And given what Barney Frank has said recently, we know the gov't doesn't seem to have a problem making loans they know damn well aren't sound.

    Our best hope is that one day soon, folks grasp that buying a home with no equity isn't a wonderful opportunity made possible by Uncle Sam. It's the equivalent of walking the plank in the middle of the ocean. But I'm not counting on it.

  2. Lisa,the Government is doing what it can to prop up prices,and it is sort of working for a while,BUT the world is essentially uncontrolable and any of a number of exogenous events could alter the situation very quickly.I do not think that it can hold together for another year.

  3. I hate to bring champagne to the wake, but as far as I can see the signs are strong that we have seen the worst. Unemployment continues to be a large problem and there are still homeowners underwater and sinking, but I have strong buyers, both first-time and move-up. Their jobs seem stable and they have realistic views of their budgets and the perils of the market. Far from collapsing, the Sonoma County markets, and Healdsburg, have been solid since early spring.
    The rumored flood of foreclosure sales never materializes as banks realize they are making more money riding the return of a strong housing market. Foreclosures were half the market a year ago. Now they're barely 10%.
    The following url will take you to a real time chart of Healdsburg's median price trends:,&ra=c&q=t,u,l,b,&st=CA&c=HEALDSBURG&z=95448&sz=m&ts=e&rt=sf&service=chart&pai=49473177&co=0&endDate=

  4. It's interesting - every economist with half a brain cell .knows the mother of all housing inventory is waiting in the wings. The only question is it 300% higher than the previous record, or is it 500% higher.
    "now they're barely 10%" - spoken like a true 6 percenter used house salesman.
    STOP your lies. You lot have ruined many peoples lives - enough now.

  5. "Foreclosures were half the market a year ago. Now they're barely 10%."

    Didn't California have a moratorium on foreclosures that was in place June - September? Hmm....could that have had something to do with foreclosures being a smaller % of market sales than a year ago?

    And what's the latest NOD count for Sonoma County?

  6. That's right Lisa. Also, banks are steadfastly refusing to pursue NOD's, instead doing what they can to keep people in their houses. Most of this of course will end in failure.
    The only statistic that's meaningful is the underwater rate. Best I can tell, that number, for Sonoma county, is approx. 50%. This is all going to end so badly.

  7. I hate to bring champagne to the wake, but as far as I can see the signs are strong that we have seen the worst.

    Check your vision:
    - Foreclosures are still rising
    - CRE is in deep trouble
    - Banks are largely insolvent
    - Unemployment continues to rise
    - Alt-A/Option ARM will begin exploding
    - Massive money injections to prop up economy/banks
    - Lurking Derivatives bomb ($50T, $500T,...?)
    - House prices still too high
    - Credit default rising
    - Less credit available to small business
    - Weakening dollar
    - S&P 500 P/E ratio is 140!!!!
    - Tax revenues are plummeting

    That is what I see, but I'm sure you've factored this into your equation, Dave. Good luck to you.

    Time Lapse Unemployment

  8. Ummmmm... BWAHAHAHA

    The worst is yet to come: Unemployed Americans should hunker down for more job losses

    Think the worst is over? Wrong. Conditions in the U.S. labor markets are awful and worsening. While the official unemployment rate is already 10.2% and another 200,000 jobs were lost in October, when you include discouraged workers and partially employed workers the figure is a whopping 17.5%.

  9. Dave,

    I agree that there are a pool of buyers that think they are getting the deal of their lifetimes on houses that have fallen from $800k to $650k. And I agree there are plenty of people out there with steady jobs (12% unemployment means 88% employment... [before I get flamed by everyone else, I understand the underemployment/discouraged worked dynamic Tyrone brings up, but there is no denying there are many people with steady work out there. Many of them are buying houses]).

    But here are a few questions:

    1. Do you consider $685,000 for a home on Village Oaks an example of "the worst" housing prices on that street will see? Two years into the start of the housing bubble these places were going for a little over $300,000 in the boom time of the era. In today's much slower economy, even with an FHA 3.5% down, 5% interest rate loan you're paying nearly $4,500 a month w/ taxes and PMI. Is that affordable?

    2. Do you agree that if interest rates rise, this will hurt housing prices? Do you see interest rates heading higher or lower?

    I have more but let’s start there.

    One last note. Banks are not foreclosing because they can't. It would wipe out their capital. Instead, while the Feds have short rates at zero, they are trying to make as much pre-provision earnings as they can so they will be able to absorb these losses down the road.

    They are NOT "making money" off this tactic. It's just forbearance. And you can bet it won't go on forever. When the supply hits, which it will, it won't be pretty for the housing market.

  10. Gosh folks,Instead of getting on poor Dave's case ask him where he gets his dope,it's obviously laced with hopium!

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