Saturday, October 17, 2009

The Price of the New Housing Mini-Bubble: The FHA Will Need to be Bailed Out

Since I work at a stock brokerage firm, I get to listen to Kudlow and Cramer crowing about the "recovery" of the housing market, and how housing prices have "bottomed", which surely means that we're on back on track to house price Nirvanah... that is, from a current homeowner's viewpoint. Aspiring buyers might view the situation differently.

I have a lot of thoughts when I hear Kudlow & Cramer. Mainly, I think about how many ordinary 'merikuns, mostly male, regard their show as the font of all economic wisdom and how they get paid 7-digit salaries to mouth this crap and don't even have to register as Investment Advisors or Broker/Dealers. So if you lost your ass and are in foreclosure as result of following their idiotic rantings over the past 8 years, you have no redress. I, on the other hand, have to exercise a little care about the advice I dispense for pay because I have securities registrations to protect and can't afford the legal fees to defend myself in the event of a complaint.

 What was before hidden from view and justified as a process of the "free market" is now out in plain view, which is that the current flurry of house purchasing is a result of blatant government manipulation, and it will probably produce the same results as the multiple government manipulations that gave us the mega-rampage of the 2000s.

At least the Democrats have some baseline level of honesty regarding the role of the government in creating debt bubbles and driving house prices to unsustainably high levels, whereas the Republicans who ruled in the past decade unblushingly referred to the Fed manipulation of interest rates, the subsidies provided borrowers and lenders through the FHA and the GSAs (FNMA, GNMA, Freddie Mac, et al), and the bailouts that financiers knew they could always count on, as the "free market". The Dems very openly state that they are trying to elevate housing prices by means of heavily subsidized FHA loans on very easy terms, while talking out the other side of their mouths about making housing "affordable".

The lower illustration is one of the signs we've been seeing on parkways all over Edgewater and Rogers Park. I called the number on the sign, and was told that you come in with a FICO of 680 or better and $500 cash, and receive your $8000 tax credit to use as your down payment at the closing. Given the required down payment of 3.5%, and current underwriting rules that permit a housing expense ration of 40%, a borrower with an income of $60,000 a year can pay up to $260,000 for a place with a $500 down payment out of his own pocket. 

Click on the upper image in order to enlarge it so it can be easily read. What it is, exactly, is the underwriting summary for a recently-issued FHA loan, with the borrower's personal information blacked out. It is not a loan for a new house purchase, but is an ADJUSTABLE LOAN for an EQUITY EXTRACTION of $133, 292 from a home appraised at $193,750.  The LTV ratio for this equity extraction (or Home Equity Loan) is over 67%. The Housing Expense Ratio is 41% of the borrower's gross income. The borrower's total expense ratio is 53%. The stated purpose of the loan is CASH OUT REFINANCE.

How long do you think the borrower will be able to service this loan? Do you think that he will make it past the first reset? Or will the loan recast as the house continues to drop in value? Do you think someone with an income of $60,000 can afford a $260,000 home? Do you think that perhaps many of these loans will become problems early on and that delinquency and default rates on the recent generation of FHA loans will equal those on all the subprime, Alt-A, adjustable, interest-only, and pick-a-pay loans that got us into this mess to begin with?

If you are a renter waiting for an opportunity to buy a reasonable place at a sensible price with a loan you can really afford, do you resent your taxes being used to subsidize more bad loans for more marginal borrowers, just to create another tower of unrepayable debt that the taxpayers will once more have to make good on in a couple of years?

Do you think that the housing "gains" based on this kind of borrowing are sustainable, or do you think that the recent surge in home sales and slight bump in prices is a government-manufactured Bull Trap and that we are poised for another steep leg down in prices, as well as the further degradation of our currency and another tax-funded bailout?Do you think that the FHA can survive a combined delinquency and default rate of 24%?

This time, the Dems will not be able to blame the previous administration for the next wave of defaults or the next round of bailouts. Obama and his advisors own the situation now, and not only haven't done anything to reverse the disastrous fiscal policies of the past 10 years but are reinforcing them and building new stories on top of the tottering tower of loans that will never be repaid. And nobody's questioning team Obama on how you can strive to raise housing prices while making housing more affordable, but that is what the tax-credit-subsidized loans are all about.


consultant said...

Laura. True. True. True.

We have become a gangster nation. No one wants to recognize that because it's too scary. It's just one of many pieces of reality we don't want to face.

We were too far gone when Obama took over, and on the 2 key issues facing him, the war(s) and the economy, he's twittered and tweeted on both (I have no idea what that means).

This is how bad a shape we're in. Our culture is morally bankrupt. When your culture is broke, you have a fatal flaw in your living arrangements. Govt., medical care, finance, law enforcement, all that becomes difficult if not impossible to solve because there is zero consensus for addressing those or any other issues.

So, for instance, we'll get a healthcare bill passed, but it won't amount to anything. In fact, it will probably make things worse. Like the Bush prescription drug bill with the big donut hole in it.

If Rome had blogs, this is what keen observers would have talked about as their empire fell apart.

About 8 years elapsed between the time Kennedy announced the moon plans and the actual launch, landing and return from the moon. This was something NO ONE had EVER done before. It took unimaginable effort to do this.

8 years after 9/11, we still have a under construction hole at Ground Zero. 8 years and we still haven't rebuilt some damn buildings!

We no longer have the will, fortitude or consensus to do things and do them right. As my dad use to say, "if you can't do the easy things, you can't do the difficult things".

Global warming, peak oil, a "green" economy, those are things that will be left to some other nation to solve. Things will happen "to" us, but we will not control our fate.

We just want something for nothing, and that road always leads to ruin.

FHA Housing Loans said...

"that is what the tax-credit-subsidized loans are all about." -- yeah so true. Great blog post. Thanks for sharing your wonderful insights. You did a great job.

Vancouver BC real estate said...

Hi. I definitely agree that we are still far from any economical recovery. On contrary, the whole US is in great debt and needs reforms. The question is whether it is not a little bit late. I really appreciate that Mr. Obama faces the situation, however, I am afraid that his reforms will probably lead to even bigger debt.
All the best,