Wednesday, September 16, 2009

Feds Promote Irresponsible Lending

Signs like the one pictured have been sprouting on parkways all over Rogers Park and Edgewater. Looks like we're setting up for another wave of foreclosures after the one just in front of us plays itself out.

If recent FHA loan generations and current FHA delinquencies and defaults can be seen as indications of where the housing market is headed, we can expect another costly home-loan bailout in a couple of more years, in addition to our current soaring default rate and the tottering $3.5 trillion tower of shaky commercial debt. Delinquency rates for recently-generated FHA loans are at 14%.

2nd Quarter Notices of Defaults were the highest ever recorded, and these were for loans that actually defaulted 6 to 9 months before the NODs were issued. Lenders have so large a backlog of delinquencies that many borrowers are in default a year or more before any action is taken against them.

The $8000 tax credit is just about to end, coinciding with the end of the selling season, and we will then see how durable the recent hike in housing sales really is. But it looks from here like the taxpayers will be paying for this recent uptick two ways, first with the $8000 taxpayer subsidy for new home buyers, and then again when these subsidized-down-pay loans start to default. Given that about 80% of all home loans being written now are FHA-guaranteed, that could mean another record-setting wave of defaults and foreclosures.

The Feds always were the most irresponsible lenders of all, inasmuch as the wave of bad lending was made possible by the alphabet soup of government agencies- HUD, GNMA,FNMA, FHA-that either backed or bought the mindboggling array of "creative" loans that got us into our current financial predicament. Now the FHA is THE irresponsible lender, and just about the only functioning home lender.


Moonglum said...

Yeah, I saw this on the street the other day too. Made me so mad. It's the $500 down $8000 back that I find particularly galling. $7500 of free money!

The North Coast said...

Don't even get me started. I'm so full of bile over the string of financial bailouts that I literally get sick at my stomach every time I think about it.

I have no words to express my disappointment in Obama, of whom I expected better than this. He's compounding his predecessor's errors.

He's definitely redistributing the wealth of this country- from what remains of the middle classes to the top 1% of Wall Street earners.

It's not enough that we have about 5 million people in some stage of foreclosure, and that doesn't even include the people who are delinquent on their house payments for 6, 9, 12 months or more, who have yet to even receive a NOD because the pipeline is so clogged. I have talked to a couple of people who have rather large loans that they haven't made payments on for months, but nobody's moving on them, and there are millions more in the same place.

Buyer beware- when all the "inventory overhang"-the houses in some stage of foreclosure, or already foreclosed but not on the market, and the mortgages that are delinquent but have no action against them yet, are on the market, we'll see more price drops.

At least now there are some minimal lending standards. I called just to do a little bit of discovery, and was told that a FICO of 680 was minimum, and you could borrow up to 4X your income (!!!) depending on how much other debt you had. Full documentation of income is required, which is also an improvement. The underwriting standards are still too loose, though; pencil it out and you will see that 4X income is an awfully uncomfortable debt load. It allows for no savings or budgeting flexibility at all.

These new FHA loans will be underwater very quickly when the wave of foreclosures, as heralded by the record NOD filings in Q2, washes over us. Then there will be another massive wave of defaults.

Our politicians don't learn from experience.