When the subprime market imploded and people starting rushing to FHA, the “chant” was that FHA is the new “subprime.” FHA originations skyrocketed and anyone who didn’t have a 700 credit score and a downpayment of 5 to 10% was quickly led into FHA. I remember reading statistics of different banks seeing a 150% jump in FHA loans.
At that point, I had a sneaking feeling that we’d start seeing some of the losses that hit subprime translating over into FHA. Well,guess what, we are.
The article cited below is about the fact that FHA is experiencing a substantial rise in what are called “Early Payment Defaults.” What does that mean? Substantially more of the newly originated FHA loans are having default issues than is typical.
What does that mean going forward?
- Increased losses for FHA
- Tightening underwriting guidelines for FHA loans.
- Higher fees and rates for FHA loans
Fannie and Freddie are already in trouble and now we’re looking at the first signs that FHA is heading for trouble too.
Interesting times….
Tom Vanderwell
The Next Hit: Quick Defaults – washingtonpost.com
The last time the housing market was this bad, Congress set up the Federal Housing Administration to insure Depression-era mortgages that lenders wouldn’t otherwise make.
This decade’s housing boom rendered the agency irrelevant. Americans raced to aggressive lenders, seduced by easy credit and loans with no upfront costs. But the subprime mortgage market has crashed and borrowers are flocking back to the FHA, which has become the only option for those who lack hefty down payments or stellar credit. The agency’s historic role in backing mortgages is more crucial now than at any time since its founding.
With the surge in new loans, however, comes a new threat. Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency’s overall growth in new loans, according to a Washington Post analysis of federal data.
Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, lax scrutiny of prospective borrowers and most notably, foul play among unscrupulous lenders looking to make a quick buck.
Bob says:
What about the even bigger next home foreclosure explosion. NOW, Thousands of loans going through the FHA Strealine REFI system. You bought a home at 97% with an FHA, now your house is down 18% (US Average last year) so you REFI the original amount (streamline FHA) requires NO appraisal, no income documentation==now the taxpayers are on the hook for a 115% mortgage===How is that going to end good?
March 9, 2009 — 1:30 pm
Chris Johnson says:
And (yes, I’m saying it) Taylor Bean And Whittaker really had systemic and deliberate solicitation of fraud. Their business practices focuesd on envelope pushers.
March 9, 2009 — 1:32 pm
J Boyer says:
This can only end in disaster. We exchanged one group of the brain dead or otherwise criminal for a new group of brain dead or criminal.
I bothers me that elected officials can be so dumb. I spoke to one on the state level today and the level of stupidity was just astounding.
March 9, 2009 — 2:13 pm
Scott G says:
A plan needs to be put into place now for when this crisis is over so the industry can emerge from this and be strong. Hopefully this will never happen again but it will only come with a better plan in place.
March 9, 2009 — 5:28 pm
Tom Vanderwell says:
A plan needs to be put into place now for when this crisis is over so the industry can emerge from this and be strong.
Scott – I think that the need for a plan to be put in place is a large part of why people like Brian Brady and Sean Purcell and I (to name a few) write as much as we do. To poke holes in theories, to expose fabrications, to shine the light on deceit and make our world better for it…..
Tom
March 9, 2009 — 7:59 pm
Brian Brady says:
“Hopefully this will never happen again but it will only come with a better plan in place.”
It WILL happen again. We’ve had like 7-8 financial crises in the past 200 years (2-3 of them worse than this one)and they all stem from speculative bank investments with the safety of a government net.
Here’s the better plan; close the FDIC and depositors will question the bankers about the safety of their money.
March 9, 2009 — 8:39 pm
Brian Brady says:
“now the taxpayers are on the hook for a 115% mortgage ===How is that going to end good?”
I think the taxpayers are already on the hook for a 115% mortgage if it’s a streamline, Bob. The streamline program gives the borrower (and the taxpayers) a better chance.
March 9, 2009 — 8:43 pm
Sean Purcell says:
I reiterate here what I commented on Greg’s post regarding this same subject:
That article is a hatchet job with no credible statistics. It’s theme is that banks are good and brokers are bad. This is a broken record the banks play over and over again. It is particularly ironic given how badly the banks deal with short sales.
I wonder… how many of these “early payment defaults” are loan mods the FHA was forced to insure? Once again, the government sticks their nose into an economic structure they do not understand. I’ve read that roughly 2/3 of all loan mods end up in foreclosure within 6 months. Why? Because they can’t afford the house!! The stupidity of creating a loan mod for such a person is topped only by forcing the FHA to insure it. Again, how many of these defaults were already defaults repackaged and insured by the FHA at Congress’ insistence?
March 9, 2009 — 9:50 pm
Bob says:
“Here’s the better plan; close the FDIC and depositors will question the bankers about the safety of their money.”
It was reported last week the FDIC is almost out of money and they have only shut down 17 Banks so far–they predicted hundreds would fail.
March 9, 2009 — 10:30 pm
Jennifer K Giraldi says:
The FHA needs to increase downpayment to atleast 10%. Hedging some losses with larger downpayments will only help prevent and absorb foreclosures. If you don’t have 10% to put down you probably should still be renting.
March 10, 2009 — 6:31 am
Michael Cook says:
“Here’s the better plan; close the FDIC and depositors will question the bankers about the safety of their money.”
I dont often say this, but this could possible be the dumbest thing I have ever read (no offense intended to the writer). The last time I checked shareholders in Citigroup dont have any FDIC insurance and they have no more clarity than a depositor. Surely they are more sophisticated and much more demanding, but alas they still cannot access the black box.
Unfortunately, people are lazy. Rather than do research, people would go back to putting money under the bed and in the freezer. The FDIC does more for banks than it does for consumers. Banks need deposits more than consumers need a 0.25% interest rate on their savings accounts or the “freedom” to write checks. Really think about what you get for direct depositing your checks. Nothing. No interest and a lot of fees. Savings account rates have been laughable for years.
On the flip side, what does a bank get. For starters they get fees for doing nothing. Heck many banks get a fee every time you ask about how much money you have or try to withdraw some of it. Furthermore, they dont even allow you to access it for 5-7 days for “processing.” Processing is code for lending it to someone else for more fees and interest.
Bottom line, dont think for one second that the FDIC is here for the consumer. Its here to keep your money in banks and not at home.
March 12, 2009 — 10:06 am