The near nothing down mentality is the new rage in the housing market. FHA loans showing massive delinquency rates and have the potential of costing the taxpayer $100 billion in another bailout
Published on Dr. Housing Bubble, by , April 5, 2011.
The Federal Housing Administration (FHA) has stepped into the housing market in a too big to fail way. Their involvement in the mortgage market is not necessarily a good thing in the long-term. The reason for the FHA popularity is the incredibly low down payment requirement of 3.5 percent. Couple this with the Federal Reserve subsidizing lower mortgage rates and you have a recipe for a nation simply pushing debt off to the future. The FHA is now a mess since it is picking up the slack of defunct toxic mortgage lenders. In 2008 HUD went to Congress for a $143,000,000 subsidy, the first in three decades. More troubling is the projected losses that could amount to $100 billion over time. The rising delinquency rates and the market share of FHA insured loans assure us problems ahead. Let us look at the proliferation of this product since the housing market bubble burst in 2007.
FHA market share of homes purchased with loans:
This is a disturbing chart for a variety of reasons. First, FHA insured loans were never meant to be a large part of the market. They were intended to help lower income Americans purchase homes yet many of the larger and more expensive markets are using FHA insured loans as their primary purchase loan product. For example, in 2007 FHA loans were 0.20 of all loans in the Los Angeles and Orange County markets. Today they represent nearly 30 percent of all loans. This is how the growth for the LA/OC area looks like:
(chart ): Los Angeles/Orange – FHA % of all loans … //
… Many in the mortgage industry love these loans since it allows them to squeeze people into homes they cannot afford. If you can’t save 10 percent for a down payment you shouldn’t buy a home. I would argue it should be 20 percent but the fact that we are still pumping out 3.5 percent down loans is maddening. Plenty of nice rental homes so this isn’t like a choice between living under the riverbed and owning a palace. Those in the housing industry argue this is good for homeownership and to that I say then you fund the loans. If you are so up on these loans you use your own money and not government backed subsidized programs that blast off economic rents to the toxic financial industry while the costs will hit the taxpayer years down the road. Enough of this toxic financial industry.
These kind of loans also force home prices to stay inflated above real market levels. If people were required to save for a down payment home prices would need to adjust lower to reflect what people can afford. Plus it shows a discipline to save and restraint in not buying every new iPhone that pops out or every new plasma TV that hits the market. In California in 1997 the median price was in the high $100k range because that was all people could afford with their incomes. Incomes have not changed over that time to reflect current home prices. The only reason prices remain at current levels is because of maximum leverage loans. FHA insured loans are the new stop-gap measure. Expect future losses here. What do banks care since this is all explicitly backed by the government (aka you)? If banks had faith in the borrowing public they would put their money out in mortgages and hold onto them. Of course they rather borrow your money and speculate in global stock markets since the return is higher.
Do you think a 10 percent down payment on any government backed loan is too high or too low? (full text and charts).