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June 29, 2009

F.H.A. Loans Skyrocket in Popularity

15-Judge-Street-0609.jpgFrom this weekend's Times real estate section: "Loans insured by the F.H.A., an arm of HUD, protect lenders from losses, thereby encouraging them to provide financing to those who might otherwise be refused a mortgage. These loans are typically 30-year fixed-rate products, but they require only a small down payment, as low as 3.5 percent — significantly less than the 20 percent standard of recent months. Often, the loans are made to people who don’t have perfect credit scores." The article says the loans now account for a quarter of all mortgages, up from 2 percent only 3 years ago. Although they often serve borrowers with less-than-stellar credit, they're considered solid because people receiving them must have verifiable income and jobs. The loans cap out at $729,750 here in New York, and condo developers who want to offer them have to "meet a variety of financial, structural and environmental standards and restrictions." As we covered a couple weeks ago, an East Williamsburg condo that offers F.H.A. loans is seeing brisk sales.
F.H.A. Loans Help Sales [NY Times]
Nondescript East W'burg Condos Defying the Market [Brownstoner]
On the Other Hand: Chase Pushing FHA Loans [Brownstoner]




Posted by Gabby at 9:30 AM | Comments (19)
Categories: Mortgage

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Comments

where can i sign up for one of these? granted 3.5 percent down on pretty much anything is still a chunk of change. and when they say less than stellar credit, what do they mean by that tho?

*rob*

Posted by: PitbullNYC at June 29, 2009 9:34 AM

Aren't these the type of things that got us into this mortgage mess in the first place? I think that's just prolonging defaults and foreclosers is all it is.

Rob, for a 400K condo in willyburg you'll still need 14,000 down (3.5%) plus closing fees which can be about 5-7K. If you have that kind of money in savings, you might as well just buy a cheaper co-op and pay way less.

Posted by: Kensingtonian at June 29, 2009 9:39 AM

I'd like to be a "fly on the wall" during rob's co-op board interview!!! :)

Posted by: daveinbedstuy at June 29, 2009 9:41 AM

"The article says the loans now account for a quarter of all mortgages, up from 2 percent only 3 years ago."

That's a rather disturbing statistic. Sounds like subprime all over again, only this time we taxpayers are agreeing in advance to cover the banks losses.

And am I the only person who thinks the caps on government sponsored loans for people "who might otherwise be refused a mortgage" should be much much lower than 729k (esp. with 3.5% down!)?

Posted by: northsloperenter at June 29, 2009 10:09 AM

The 3.5% down is correct and if you have that, then contact the EOHC, WWW.EOHC.US . They can broker and FHA purchase for you.

Posted by: Phil at June 29, 2009 10:11 AM

norhtslope, I am with you on this one. Disaster waiting to happen.

Posted by: Kensingtonian at June 29, 2009 10:18 AM

Another POV; am I wrong in thinking that, while FHA might apply to those with less than stellar credit, doesn't it also benefit those who are first time buyers when the steep cost of entry for places like NYC is cost prohibitive? That's sort of my personal experience. We're looking to buy, have pretty good credit (700+) and a little in the bank, but when you're looking at ~$400K just to get into something, and you're trying to come up with the savings for that while also dropping $2K+ a month on rent, that saving process can be a slow go for those on a modest salary. I'd hate to think we're lumped in with the "disaster waiting to happen" people simply b/c we don't make tons of cash and NYC just happens to be crazy expensive.

Posted by: UnrealEstate at June 29, 2009 11:00 AM

and hasn't FHA been around for 70 years and don't they have a lower foreclosure rate than other mortgages?

WHy not just jump to conclusions like typical brownstoner commenter reactions based on little than cursory information?

Posted by: Petebklyn at June 29, 2009 11:41 AM

UnrealEstate,

Part of the reason NYC is crazy expensive is because government programs like these drive up prices of homes.

Every time the government helps someone buy a home they could not otherwise afford (i.e., they cannot make a 20% down payment and qualify for a traditional mortgage), it adds a buyer to the housing market.

Every time you add a buyer to the housing market, you drive up prices (or prevent prices from falling as much as they would have).


So, what happens over and over and over again are stories like this:

Seller A wants to sell his house for $500K.

Buyer B has 100K saved for a down payment and good credit, but he thinks that $500K is too much money for this house. He offers $450K.

Buyer C wants to buy the house and doesn't care what it costs cause it is a nice house. Unfortunately, Buyer C cannot qualify for the mortgage and only has $25K for a down payment.

Banker D looks at Buyer B and says "sorry, I'm not loaning you $475K to buy a $500K property". Banker D looks at Buyer A and says "sure, I'll loan you $350K for a $450K property".

Now, what should happen here, is Seller A should lower his price until Buyer B is willing to buy his house. Buyer C should go on saving money until he has a bigger down payment or buy a cheaper property.

But, what happens instead is the Government tells Banker D, "go give Buyer C that loan, and the Taxpayers will pay it off if Buyer C defaults".

Banker D says, "Sure thing Uncle Sam!" Loans 475K to Buyer C, books a nice profit, gives himself a nice bonus, and sleeps easy at night knowing that the taxpayer is going to suffer if he made a bad choice.

Buyer C then goes to Seller A and buys the house. Seller A happily sells to him for $500K and laughs at Buyer B saying "buy now or be priced out forever! hahahahahaha!"

So, Seller A is happy, Buyer C is happy, Banker D is happy, the taxpayer is taking all of the risk, and Buyer B is punished for trying to be financially responsible.

I'm sure this is not what the people who created the government plan intended to have happen, but this is how it seems to be working.


Now, if these types of loans are 2-3% of the marketplace, then they really don't have much of an impact on Buyer B. But when they are 25% of the marketplace, then even if Buyer C never misses a mortgage payment, Buyer B is still losing in this scenario.

Oh, and Buyer C is losing too, because if there weren't a whole bunch of buyers like him in the market, prices would come down.

Posted by: northsloperenter at June 29, 2009 11:56 AM

very nice explanation northslope!

pete, FHA has been around for many years but it was 2-3% of mortgages not 25%. That's where the problem is.

Posted by: Kensingtonian at June 29, 2009 12:01 PM

every year you deduct mortgage interest on your tax form you are part of reason driving up house prices.
Why don't you complain about that deduction. Why only complain about gov't programs that someone else benefits from and not you.

Posted by: Petebklyn at June 29, 2009 12:05 PM

the problem with this program is not that it drives prices up but the low equity the buyer puts in -- 3.5% down is a joke with real estate markets as volatile as they are, a bad month could put you underwater. Not sure how verifying income and employment would turn that into a "solid" loan.

Posted by: woodys at June 29, 2009 12:44 PM

FHA loans do help those with less than stellar credit and traditionaly don't penalize the borrower for fico scores unlike Fannie/Freddie.

FHA loans are more stringetn on DTI (debt to income ratios)
FHA loans want a 33% front end ratio with a 41% back end ratio. That means that no more than 33% of you GROSS income can go to pay the mortgage and 41% of all your montly debts can not excede 41%.

Freddie Mac is 45% back end ratio and Fannie Mae goes higher, i've still seen loans with 54% back end ratios get approved for low LTV's.

Conforming Jumbos for Both Fannie and Freddie are at 45% back end ratios MAX.

Hope that clear up some questions.

adahill@approvedfunding.com

Posted by: Adam Dahill at June 29, 2009 1:11 PM

woodys -- I agree 3.5% down is the scariest part of it. I'd be a lot more comfortable seeing the government help people to get a mortgage if they could put 20% down.

But the side effect of letting people buy with 3.5% down is that a lot more people can buy more expensive properties and thus drive up prices for everyone else.

These types of "home owner assistance" programs are self defeating if they get too large. They must remain a small part of the market if they are going to help people without distorting the market.

Otherwise you get a feedback loop where people getting govt. help drive up prices making it harder for other people to afford homes, thus increasing the number of people seeking govt. help who then go and drive up prices more which makes it even harder for other people to afford homes, so even more people seek government assistance, etc. etc. etc. until the bubble bursts.

Like I said, at 2-3% of the market, I think these loans are fine. At >10% of the market, there is a serious problem. It reeks of corporate welfare.

Posted by: northsloperenter at June 29, 2009 1:28 PM

northsloperenter I guess we're basically saying the same thing, but I'd point out that excessive leverage on a large scale can also drive prices below fair value (whatever that is) in a bust. It's just structurally unsound.

Posted by: woodys at June 29, 2009 2:03 PM

You naysayers are all nutcases. The FHA loan program has helped people buy inexpensive ($200,000 and lower) houses and apartments in very expensive areas (NY, SF) for years and as others point out above has a very low default rate. This is not what caused the mortgage bubble -- that was predatory lending.

Posted by: mopar at June 29, 2009 2:38 PM

"the loans now account for a quarter of all mortgages, up from 2 percent only 3 years ago"

Translation: Prices are getting WHACKED!

"The loans cap out at $729,750 here in New York"

Translation: Prices are getting WHACKED!

"developers who want to offer them have to 'meet a variety of financial, structural and environmental standards and restrictions.'"

Huh, like 50% sold? Good luck with that...

***Bid half off peak comps***

Posted by: Brownstones Half Off at June 29, 2009 3:38 PM

I got really lucky and am about to close on a 2-family in Greenpoint with an FHA loan. There is a ton of red tape to deal with this type of loan. I have an ultra secure government job , 10 years on the job. They required Bank statements, VOE from employer, 401k statements, 2 years tax returns, 2 years W2 statements, and a lot other documentation.

The program imho is great right now for people with decent/good credit and very stable jobs. HUD dots every I and cross every T. You will have to verify everything , they are strict, and be prepared to wait months to close your deal. They are really strict about the DTI , if your numbers are off , you will not qualify. My wife and myself make over 100k and could barely qualify for a 500k loan on a legal 2-family with rental income. If anyone is looking to buy a condo with an FHA loan , you better conform to their DTI ratios , this will be more difficult without the benefit of added rental income.

Posted by: rdl1972 at June 29, 2009 6:21 PM

You're a fool if you think people with "less than perfect credit and who can't afford 20% down" are the only ones who buy highly levered...

Posted by: goodoleboy at June 29, 2009 9:35 PM

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