Posted by Jim Lindgren:
FHA Adopts Countrywide's Business Model and It's Not Working . . . Again.--
http://volokh.com/archives/archive_2009_08_30-2009_09_05.shtml#1252185144
Nick Timiraos and Deborah Solomon at the Wall Street Journal have an
[1]excellent report on problems at the FHA (Federal Housing
Administration).
"They're probably going to need a bailout at some point because
they're making loans in a riskier environment," says Edward Pinto,
a mortgage-industry consultant and former chief credit officer at
Fannie Mae. "...I've never seen an entity successfully outrun a
situation like this." . . .
Before the boom, the FHA wasn't a big player in the housing
business because it didn't follow private lenders in loosening its
standards. Borrowers had to fully document incomes and insured
loans were capped at $362,000. Congress increased those limits last
year to as high as $729,750 in the most expensive markets. In
August, the FHA and the U.S. Department of Veterans Affairs backed
40% of loans for all home sales. . . .
Last year, the agency ended a program that allowed sellers to fund
down payments. While that program accounts for around 11% of the
FHA's loan book, it has generated 22% all loans that are seriously
delinquent or in foreclosure.
In 2005, the FHA loosened its maximum loan-to-value limit on
cash-out refinancing to 95%, from 85%. The agency moved that limit
back to 85% earlier this year.
While most private lenders have raised lending standards and now
require minimum 20% down payments, the share of borrowers who are
able to make down payments of less than 10% hasn't changed in the
last two years, largely because of the FHA, says Mr. Pinto, the
former credit officer at Fannie Mae.
Marketwatch [2]summarizes the problem:
The government seems to have taken over Countrywide's business
model, and it's not working out much better the second time around.
The Federal Housing Administration may be next in line for a
government bailout because it's losing a lot of money on bad
mortgages, according to a report in the Wall Street Journal.
When the subprime mortgage industry self-immolated a couple years
ago, the staid FHA was ordered into the breach to try to stabilize
a market in freefall. As the bubble expanded earlier in the decade,
the FHA hadn't relaxed its lending standards, unlike its
swashbuckling counterparts in the private sector.
But once the housing market started to collapse, the government
decided the FHA should try to prop up the market. The FHA loosened
its standards a bit, though not as far as the subprime sharks had.
FHA guaranteed loans with a down payment as small as 3.5% and let
borrowers take a lot of cash out of refinancings. Congress also
doubled the maximum loan to $729,750.
The federal agency, which guarantees loans made by private
companies, also briefly allowed sellers to finance down payments.
The result was predicable, at least to anyone who was paying
attention to the way the housing bubble collapsed. The FHA
increased its market share from 3% to about 23%, and more of its
loans began to go sour.
The Congress, not just the FHA and the Veterans Administration, have
been trying hard to reinflate the real estate bubble. This reminds me
of the successful efforts of the Hoover and FDR administrations in the
1930s to prevent wages from dropping to their market-clearing level,
actions that were disastrous for the economy. The quicker housing
prices reach their market-clearing level, the sooner a strong recovery
can start.
References
1. http://online.wsj.com/article/SB125202440174685297.html
2.
http://www.marketwatch.com/story/fha-adopts-countrywide-model-with-same-result-2009-09-04
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