Stevens also wrote a Letter to the Editor regarding New York Time's September 19th article. Here is a link to Steven's response:

http://www.nytimes.com/2009/09/28/opinio....

My Response to Stevens' Letter To the Editor:

To the Editor:

RE: “The View From the Federal Housing Administration” in response to “The Bill Comes Due, Vexing Housing and Banking Agencies”

In regard to Commissioner Steven’s response to the article “The Bill Comes Due, Vexing Housing and Banking Agencies”, I would like to point out some inconsistencies.

First off, Commissioner Stevens points out that the subprime default rate is over 3 times the FHA default rate. However, Commissioner Stevens fails to provide the source of the data. In reviewing the FHA delinquency and default ratios and researching the issue, the actual FHA delinquency and default rates are difficult to ascertain. While HUD officials often quote statistics provided by the Mortgage Bankers Association delinquency survey, I have yet to see hard statistics provided by the agency that is based on their own data that is tracked monthly on HUD’s Neighborhood Watch website. The data provided on the HUD Neighborhood Watch website conflicts with MBA data, and the August servicing report that includes all servicers and FHA endorsements indicates a combined delinquency and default rate that exceeds 20%. That is in excess of 1 in every 5 borrowers that has either been delinquent or in default on their FHA loan.

However, the most disturbing issue regarding the current FHA delinquency and default rates is that FHA endorsements have been increasing substantially during the last few years which effectively dilutes the overall FHA delinquency and default rate. The reality is that the number of both delinquencies and defaults has increased exponentially, and that the rising defaults have been partially concealed by increased FHA production. Unfortunately, the increase to delinquent endorsements is not readily apparent because HUD stopped reporting delinquent endorsements on the FHA Outlook report in February 2009 after delinquent endorsements surged by slightly over 48% in January 2009.

Going back to the MBA delinquency survey, this is a voluntary survey that does not include all lenders and excludes those loans which have entered the first phase of foreclosure. While the report has use as a means of checks and balances against other data, I do not see where this data would be more reliable than the data that is reported from servicers directly to HUD.
Another factor to consider is that time is as much a factor on delinquency rates as dilution, and older loans originated during the peak typically have higher delinquency and default rates. Since subprime loans are older than the bulk of loans that comprise FHA’s book of business, subprime loans should significantly under perform FHA loans. However, it should be noted that certain FHA loan vintages do have delinquency and default rates which rival subprime loans.

Now, let’s discuss current FHA credit quality. While Commissioner Stevens states that the FHA average credit score is increasing, he fails to address material weaknesses that are inherent to automated underwriting via TOTAL Scorecard. Automated underwriting consistently makes approval recommendations for loans with excessive debt to income ratios along with layering of other underwriting flexibilities.

In a deteriorating economy with rising unemployment, rising poverty, rising cost of living, rising defaults and declining median family incomes in conjunction with declining values, allowing debt to income ratios in excess of FHA’s standards of 31/43% is a recipe for disaster. However, it should be noted that AUS TOTAL Scorecard typically accepts debt ratios into the low 50’s. Loans with this level of debt in this environment are not mathematically sustainable regardless of credit score. This is nothing more than faith-based underwriting.

The fact that FHA’s capital ratios have quickly deteriorated and are expected to fall below 2%, along with HUD’s emphasis of the HAMP program for FHA loans, indicates that things are not as rosy at FHA as one would like to believe. The creation of the FHA Chief Risk Officer only serves as further proof.

Although credit scores are increasing, credit scores are not a reliable means of assessing overall credit risk or long term success of any loan. This can only be achieved via good old fashioned 5 “C” underwriting. In fact, by lenders and FHA over relying on credit scores instead of traditional underwriting, many borrowers (especially minorities and underserved) are at risk of being displaced while higher score borrowers are allowed to obtain risky loans with excessive layering of risks. Additionally, by putting too much weight on credit scores, it creates a situation whereby FICO is the ultimate underwriter.

HUD needs to tighten AUS TOTAL Scorecard standards and revisit the issue of debt to income ratios. I highly recommend that FHA implement a residual income test to ensure that borrowers truly do have sufficient funds left over for family support. As to lower score borrowers, HUD needs to publish the data on defaults by FICO score tier, debt to income ratio, and loan to value. Rather than displace borrowers who may have been victimized by zombie debt or who do not use credit, appropriate premiums and underwriting overlays should be implemented- especially in underserved areas.

So, I disagree that everything is honky-dory at FHA. I highly doubt that FHA’s plan to hold lenders accountable for third party fraud and reimbursement will be successful. Unless FHA merely declines the bulk of the rising claims, taxpayer support should be an eventuality.

I would like to encourage Commissioner Stevens to work on expanding FHA, increase reviews of lender insurance to at least 10%, overhaul FHA TOTAL Scorecard, and create mortgage insurance premiums that are based on overall risk. In addition, HUD needs to provide an honest accounting of true delinquency and default rates and stop quoting MBA statistics.

Thank you,

Krista Railey

An Engineered Financial China Syndrome...

I wonder if the Center of the Earth looks like those old Jules Verne fantasies with dinosaurs and giant ferns or if there really is a molten metal core.
The FHA mining machine will evetually allow US to see if We continue to dig Our HOLE...

"Journey to the center of the Earth"

I'm afraid the FHA is being used as another back door bailout vehicle for the banks. FHA seems to be knowingly issuing bad loans. But why? Likely, it is to support the market while banks unload as many junk mortgages as they can.

Just what we need, more over-priced junk paper in the system. Our Government is knowingly allowing more poison to leach into the well. WTF!

I'm getting tired of blaming the bankers and regulators. I know many knowingly committed fraud or looked the other way, but I also think the nature of our debt money system demanded that we delude ourselves.

We need a system that allows for credit expansion, but can exist without credit expansion. The current system requires credit growth or it implodes. And we are so far into the steep part of the exponential credit growth curve (largely due to past fraud), that we now need to manufacture trillions in new credit yearly just to keep the ponzi debt system from imploding. The type of credit issued is less important than the fact that credit is expanded.

IIRC, in the 1960s we passed $1 trillion in credit issuance for the first time. Today we need to "manufacture" almost 3 times that in credit yearly just to keep the debt money system from dying. Prudent people performing productive work can't keep up with the yearly need for trillions in new credit. No way, no economy can. Even scam artists on Wall St. can't keep up with the need for exponential new credit growth although they sure get paid a lot for trying.

How does it feel to be a slave to an insane credit growth system?

We better hope interest rates approach zero like in Japan or this credit growth system and its grotesque distortions will lay waste to all.

One note Gen, the AUS underwriting example you provided in your prior Ticker could result in a loss despite the 67.7% LTV. The equity pad was only approximately $60k. In the event of default, the equity pad could easily be eaten away by lost interest, advances for insurance and taxes, legal costs, property damage, and cost of sale. Also, further market declines could easily result in negative future equity.

In the example you provided, the borrowers should not have been enabled. In fact, I recall they may have had credit issues as well due to the presence of a judgment.

Underwriting that is based on LTV and credit scores is flawed.

My biggest issue remains that HUD is not being truthful to either taxpayers or Congress. I've poured through tons of Testimony made through 2008 and 2009 from HUD officials, and the OIG seems to be the only agency that admits there is crisis with rising delinquencies and defaults.

MBA statistics are repeatedly quoted by HUD/FHA officials, yet HUD maintains their own statistics which indicate delinquency and default rates that are significantly higher than MBA statistics. To disregard their own statistics in favor of less reliable statistics that are more favorable is questionable at best.

What other information is being distorted?

DTM I'm aware of the possibility of loss but you have to draw a line somewhere. I choose to draw it at never allowing the FHA to take a loan that either (1) exceeds 36% DTI OR (2) exceeds 92% CLTV at origination. If we limit FHA originations to the former 216kish then there's an argument to be made that assisting the low end, even where there are some defaults, is acceptable.

In reality we need more cushion than that because rehab/resale hits taken nowdays on CLEAN departures (where the owner doesn't pour cement down the toilets before leaving, etc) are running around 20%, implying that legal and rehab are eating 12ish% per unit.

This is of course why I have always supported a 20% downstroke/80% CLTV limit... gee, anyone wonder why any more?

You make solid points, but I don't believe that $216,000 should be considered the low end. This is just about right, if not on the high side for most median wage earners. Current loan limits are unreasonable based on incomes. If the loan limits are going to substantially exceed median incomes, LTVs and CLTVs should be limited to a maximum of 85%.

Also, in addition to revising debt to income ratios, residual income tests should be required for every loan. Affordability cannot be based on an arbitrary ratio, but should consider the spending habits and obligations of the borrowers. A borrower that drinks, smokes, has kids, commutes, and is a big spender will have a lower affordability than a borrower with a simple, vice free/kid free lifestyle.

Affordability should never be stretched due to LTV. In fact, affordability should be closely scrutinized in order to protect borrowers equity and/or investment. Equity based lending has long been considered predatory. Beside, FHA is legally required to determine that the borrower's income is sufficient to pay the mortgage and recurring liabilities. Equity is not an acceptable source of repayment (unless its a HECM loan).

FHA is not willing to limit DTI nor are they willing to limit borrower investment. They aren't tightening anything except the noose around lender's, borrower's, and the taxpayer's necks. FHA/HUD won't even come clean on the delinquency/default crisis or publicly disclose the actual delinquency/default rates.

In fact, according to Commissioner Stevens, HUD plans to do away with FHA broker approvals by raising the net worth requirements for lenders and making lenders liable for brokers. These changes are supposed to be accomplished through rule making procedures in the future.

Also, according to Commissioner Stevens, FHA intends to increase the LTV on refinances to 125% (CLTV's are currently limited to 125%).

Yeah, I know.... and this is going to blow up. Badly.

My understanding is that the buyer must pay an additional 1.875 percent for Principal mortgage insurance at closing, and that the FHA interest rate the buyer is paying includes about a 0.5 percent annual fee that is going to the FHA.
That does not mean the FHA is not sinking quickly, just at a slower rate than the FHA default rate implies.

With all due respect, the UFMIP is 1.75% on full doc refinances and purchases. For full doc refinances and purchases with LTV's over 95% (excluding MI premium) and greater than 15 year amortization, the annual premium is .55%. For LTV's under 95% and amortization terms greater than 15 years, the premium is .50%. On 15 year loans with LTVs under 90%, there is no annual premium. 15 year loans with LTV over 90% have .25% annual premiums. Streamline refinance premiums are 1.5% which is offset by refunds.

Prepayment rates do impact the MMI fund as do delinquencies and defaults. This is interesting because while lower score borrowers may have higher delinquency rates, they do have lower prepayment rates and higher cure rates. Hence, the increase in average credit scores really shouldn't give anyone the warm and fuzzies.

However, relying on premiums from loans that are not sustainable to offset the losses on loans that are poor credit quality (intentionally) as well as to conceal the rising delinquency rate is the epitome of a Ponzi Scheme.

Nonetheless, I do agree that the fund is not sinking quickly. However, that has more to do with lenders extending the foreclosure period and FHA not approving claims. I would like to see HUD release information on the number of lender indemnifications and rejected claims. I am also dying to read the FY 2009 Actuarial Review of the MMI Fund. 2008's assumptions were overly optimistic and I expect same for 2009. However, I must point out how quickly FHA's capital ratios have deteriorated during the last few fiscal years.

Yes, HUD will be able to keep up the dog and pony show for quite some time to come, but there is a day of reckoning, and I can already imagine that FHA will feign surprise just as the Fed feigned surprise over Bear Stearns which was the biggest no-brainer of the century.

Here's the straight scoop from themortgagedude. 16 years origination experience and currently working for a firm that is not doing FHA loans, but many years experience in the past.

Skin in the game counts. Oh boy does it count. 3.5% in a normal market is probably enough. Most likely not now. (The real problem comes in when you allow the borrower to use gifted funds or tax refunds as the down payment)

Ratios matter and for any ratio of over 41% back ratio there should have to be a compensating factor to approve the loan. AUS right now approves them all day at 47,48,49 and higher if they have great credit scores of say 740. (How about a rule that states that to go over 41 you must have three months reserves for every point over 41 you go. So if you go to 49 it requires 24 months reserves)

Credit scores matter - you are seeing loans being approved at 620 fico and these people have very marginal credit at best. (How about asking for additional downpayment money at lower credit scores)

Reserves matter and they don't even have requirements. (How about requiring reserves - I'm OK with using FTHB tax refund for this)

Job stability matters - and its not even really looked at in AUS.

So right now you can have four jobs in the last year as long as you have no job gaps, no reserves, use your tax refund as the downpayment and close with a 620 fico score. These borrowers are one job loss or medical emergency from default. Fine loan program they've got going here.

Lately there have been a lot of stragglers to the home purchase party calling me asking for down payment money (i don't do mortgages, that's another team). These folks can't get approved for a single digit car loan, but the gov't is helping them buy houses with borrowed money from mom and dad at 5%. This will end very badly.
And everyone should read my tag line and think about this one question:
What happens in these blighted neighborhoods when the crime wave starts to crest? Having massive welfare programs and a minority serving as president are helping so far. When they aren't anymore...

Any questions?

I'm surprised with the chart there and I'm not. Those numbers are higher than what I thought they would be - but I knew they would be bad. Take a look at the 2004 loans from when FHA was doing 3% minimum investment but there were still subprime loans available. These loans would have performed if not for the decline in home prices at a level that would have kept FHA self sustaining. The problem is home prices and the job losses. Not so much the loan program. That said look at the default rates on newer loans and think about where this leads. It needs to be tightened further on guidelines for now.

Quote:

These loans would have performed if not for the decline in home prices at a level that would have kept FHA self sustaining. The problem is home prices and the job losses. Not so much the loan program.

But TMD, declaring that a program can "work" by requiring unsustainable home prices and nearly full employment, is by definition, declaring that the loan program is broken.

Who's this stupid ****sucking Chinaman on CNBS right now.

There are no toxic Fannie or Freddie MBS he says. If I knew who he was I would walk a mile to kick his ass. I guess he says this because the government is just gonna back it up. But I remember writing Expanded Approval Level 3 loans at 100% ltv with 545 fico scores. Hope the MI companies don't go broke cause those loans are belly up now.

Back when this crisis started than-senator Clinton made a proposal to use FHA to solve the problems:

http://www.fhaday.com/2007/05/21/senator....

http://www.fhaloanpros.com/2007/10/hilla....

and now this is where we are:

http://www.calculatedriskblog.com/2009/1....

Hey Cookie Monster. FHA programs were basically sound practices till the bubble blew on RE prices. At that point they became much more agressive to compete at FHA. Allowing seller paid DPA was probably the most outlandish act. That put loans on the books at 101% LTV no matter what they said. Also AUS Total Scorecard is ridiculous in allowing DTI of over 29/41. Going back to the old way of doing things would work in the long run. In the short run there really is no answer. NONE. Going to Gen's idea of 20% down will absolutely destroy RE markets. That is both good and bad but rest assured it will involve tremendous $$$ outlay by the government. No matter what we do now the unintended consequences will be extreme. I guess what I'm saying is we are just truly ****ed.

Not sure if this was mentioned:

http://www.nytimes.com/2009/10/09/busine....


In the year since the government stepped in to rescue the collapsing mortgage giants Fannie Mae and Freddie Mac, the agencies have taken $96 billion from the Treasury, and may still need more.

MUST. PERPETUATE. PONZI. SCHEME.

Etz, where did you find the chart on the FHA defaults?

I tracked endorsements and 90 day + delinquencies for a small sample group of lenders via HUD Neighborhood Watch. The default rates for the 2007 and 2008 vintages do not coincide with the chart in regard to 90 day + lates. 90 day defaults for 2007 ranged between 6% to 22% for 2007, and 2% to 10% for 2008 for the group of lenders I reviewed. Note: these were 90 + lates within the first 24 months of origination only.

Yet when I looked at the same lenders current default rates with a couple of the major servicers that includes all loans and delinquencies (not just 90 day lates or loans originated during the last 24 months), I found combined delinquency and default rates between 11% and 32% for all loans. Unfortunately, the way HUD reports servicing data, I can't break out the endorsement dates to determine delinquency rates by origination date.

However, based on HUD dilution and the current combined delinquency and default rate of 22%, the chart makes sense if you include all delinquencies assuming low default and delinquency rates for originations made during the last 12 months.

No doubt the default curve is much shorter for loans 2007 + loans, and if HUD cannot maintain constant dilution, the default rates should get real ugly after the 2009 vintages are seasoned about 18 months.

DTM, it's from an article in The New York Times.

F.H.A. Problems Raising Concern of Policy Makers
By DAVID STREITFELD and LOUISE STORY
Published: October 8, 2009

http://www.nytimes.com/2009/10/09/busine....
http://www.nytimes.com/imagepages/2009/1....