I bought my first home in 1989 utilizing a FHA First Time Buyer program at an ungodly low 7.99% interest rate.

The purchase price was $64k. Despite the fact that I put 25% down, I was subjected to what I felt was beyond ridiculous scrutiny, to the point that I became lifelong enemies with the people at the bank that originated the loan, by the time closing day came.

I just cannot fathom the policy changes from then to now, in what I always believed to be a very safe, very conservative government sponsored entity.

I bought my first home in November 2006. Yeah...stupid I know. There were family issues as to why we made the asinine move. My grossly over-valued home now sucks my life out of me every month. I deal with it.I pay my bills....I still see no time in the next 20 years, where I could re-coup the value.

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We desperately need higher-quality buyers in the market

There's only 2 ways to acheive this. Either people get out there and 'do sumpin' thereby incresing their value-addedness to society and net worth...

...or home prices come down relative to wages. End of story

carry on

For years FHA has been able to sustain its reserves against losses. In times past their was as much as 3.8% charged upfront for MI. (or as low as 1.5%) The problems with FHA actually eminate from the subprime crisis just as the problems at Freddie Mac and Fannie did. The whole house of cards has come tumbling down upon us.

Back before subprime got out of control and went to 0 down payments you did not have the runaway housing pricing. Normal 4% rises gave a level of safety to FHA. But then you got the buy now or be priced out forever and Fannie Mae and Freddie started doing their 0 down loans with as low as 580 fico scores and FHA went away from their 3% investment requirement by using DPA. Well someone who has 3% in the game is not going to default very often into an environment of gradually rising home prices so all is well. People with 0 down are much more willing to default and much more willing to gamble upon rising home prices because of their lack of investment. So why not chase rising prices - its not my money they think.

What was once a great program to support home ownership in the working class and first time home buyer market is going to suffer HUGE losses. What should have happened to prevent it from failing in this way? HUD should have been willing to let others throw their $$$ away at the $0 down loan and not changed their rules in any way. FHA was put their to support the housing dreams of Americans and it wasn't needed at the time. But they chose to push the DPA programs and compete and losses will be HUGE.

I don't think that we want to push FHA to 20% downpayments but I would fully support requiring 3.5% down from the borrowers own funds. And not allowing this horse**** of using the $8000 as down payment. Also I would be in favor of requiring reserves to be held in an escrow for unforesen expenses. If they can't come up with the reserves I would require them to be put into the payment and held in an escrow for them. And I would count that against them in their ratios. And 43 back ratio is OK I guess, but only for some. I like the VA way of doing it better where you also calculate a residual that is left after housing and other expenses and require that they have a certain residual per household member. 43 back ratio works a lot better for someone earning $120,000 than it does for family of four earning $32,000.

>> very safe, very conservative government sponsored entity.

DANGER! DANGER! Contradiction-in-terms meter overload!

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FHA must be reformed and the lie factory shut down here and now. 28/36 DTI (front and back end) ratios must be reinstated and strictly enforced. In addition, down payment requirements must go to 20% - cash - no gimmicks.

This is simply unfair! This means that I can not go out and purchase a 500k home with the 8k .gov handout and a 50k per year job!!!! Where do you come off making such a statement? I live in America and deserve what you have!!!

/sarcasm

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This is simply unfair! This means that I can not go out and purchase a 500k home with the 8k .gov handout and a 50k per year job!!!! Where do you come off making such a statement? I live in America and deserve what you have!!!

/sarcasm

Dont forget the Cadillac too. I've been waiting for mine to show up for years. Where is it?!?!?!?!?!?!?!?! I'm gonna throw a fit!

MortgageDude, I agree that the program would not have the problems it is having if values had not been inflated by 100% financing and no income doc loans. SFDPA also had a severe impact on FHA loans.

However, AUS TOTAL Scorecard and higher debt to income ratios did a tremendous amount of damage. In a sense, AUS TOTAL Scorecard has become fraud by proxy in that it allows lenders to rely on AUS recommendations thereby absolving them of the responsibility to determine that the loan is sustainable. This is in direct violation of Federal law. The other issue regarding AUS is document waivers which further compromise the fund.

However, the worst problem is the $8000 tax credit and loans which will allow borrowers to not only not make a down payment, but to pocket up to $8 Gs. Consider this, a borrower purchases a home FHA using a tax credit loan for the down payment. The seller and lender pay the closing costs, and after the borrower re-files, they get their tax credit without having to pay back the loan immediately. If the borrower wants to keep the cash, or heaven forbid, is an early payment default, they keep the $8,000. Knowing the historical issues with straw buyers and fraud, tell me that isn't an $8,000 incentive to commit fraud.

As far as VA goes, while I wholly endorse VA residual income tests, when was the last time their guidelines for balance left over for family support were adjusted? The residual income levels are too low, and don't pencil out with real life cost of living. However, I will give VA a hat tip for random appraiser assignments. They do have the best appraisal system out there even though realtors and mortgage lenders often complain.

In regard to FICO score, I'm not convinced that low FICO scores are more risk than excessive debt to income ratios. I've been trying to correlate the default statistics for FICO tiers with one lenders production, and their default rate should have been 2 to 3 times as high based on their FICO distribution. The only possible explanation I can find for this is that the lender used a higher than normal percentage of manual underwriting. However, I have a FOIA request coming, and if HUD releases FICO score information, I'll have slightly over 2.6 million records as a sampling.

The problem with DTI of 31/43 (or 33/45 for energy efficient properties) is that inflation has driven up the cost of living making DTIs in this range unsustainable for most borrowers. Just for fun, calculate the basic costs for food, utilities, transportation, insurance, medical, child care, savings etc. The next time a borrower applies for a loan, calculate the residual income the same way you would do for a VA loan.

I used to go round and round with Karl on this issue, and then I decided to show Karl up by running residual income tests on every loan application. Needless to say, it was an eye opener.

Having counseled many borrowers on loss mitigation (no charge), and going over their expenses with them, I found that high ratio loans are a default in the making.

I do not blame lenders or originators for this problem. Many lenders believe they are doing the right thing based on accepted underwriting criteria and agency mind set. Its FHA's responsibility to adjust DTI- not terminate lenders a few years down the line when their default rate rises. If a loan is made in good faith in accordance with FHA guidelines, FHA has no business terminating them from the program when the inevitable occurs. There is a 5th "C" which has long been ignored, and it is for conditions- as in "market" or "economic" conditions. Economic conditions and inflation conditions dictate a need for tightening.

Credit needs to be more important than score, and capacity needs to return to being an important factor. After all, it is Federal law.

FHA will silently get bailed out as will FDIC. The gov't can do this without anyone knowing.

20% down = 1/5 down = 4 to 1 leverage, not 5 to 1.
/nitpick

Math you make some good points. I would guess given 6 hours and a couple of twelve packs you and I could agree upon guidelines which would keep future FHA originations from costing taxpayer dollars. Without 20 percent down.

TMD, why is everyone hellbent and determined to avoid both leverage limits and proved savings capacity (which is what 20% down does)?

Both of those are CRITICAL skills for someone to be successful in long-term homeownership.

Are FHA loans no-recourse loans?

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TMD, why is everyone hellbent and determined to avoid both leverage limits and proved savings capacity (which is what 20% down does)?

A variety of factors. Lately, banks preach "cheap money" and "low monthly payment". This allows more cash in the customers pocket to spend on crap, vs. spending it on an "asset". (Some argue a home being an asset but thats a different story). Regardless, this technique should be reserved for investing professionals who know how to use the money saved every month, and put it toward making more money. It is not geared toward the consumer who goes and wastes it on Made in China crap and is 1 paycheck away from failure.

There is also the "new paradigm" mentality on mortgages (20% is sooo 1990's blah-zay), and the pumping of "you'll only live here 5 to 7 years anyway".

And lets not forget the massive food chain of profit on originating a mortgage. Escrow, banks, appraisers, realtor, etc etc. Greed greed greed.

The list goes on and on. Mathematically, it adds to proving "new age progessiveism SUCKS"

Edit: I forgot a big one! The fact that saving and sacrificing for 20% down would require a mentality that very few have had instilled in them born after 1980. It's unfathomable that people cant have Starbucks AND a home. in fact, it's pratically an entitlement right? Sad...

My personal experience Gen is that borrowers that put a 5 percent down payment down have a low likelihood of default. The rules have all changed in this bursted bubble though. Prudent underwriting and guidelines would have prevented the bubble. Just speaking of what I've seen in my 16 years of originating loans

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why is everyone hellbent and determined to avoid both leverage limits and proved savings capacity (which is what 20% down does)?

If the entire mortgage market required 20% down, in actual cash, not PMI or .gov backstop, then the price of homes would be tethered to savings, not debt origination.

How long have Americans had a negative savings rate?
What is the net worth of the average American? (sans equity)
How could a 28yo married couple with two Masters Degrees afford a home if they had to pay cash, given that their college debt is astronomical?

Prices would come down to the sub-$200K range for higher end, bicoastal suburban real estate (was in the $800-$1M range two years ago).

The reason they are hellbent on avoiding such is that the entire mortgage portfolio for suburban, ALT-A/PRIME real estate would default. Well...maybe not 100%, but well in excess of 75%.

"If you sit down and really crunch the numbers and look at residual income, you will find that these debt ratios cannot be maintained in high cost areas for certain income groups." do_the_math

" ... a whole lot of "new borrowers" with absolutely no skin in the game."

" ... yet another government lie factory for a huge explosion with this one threatening to detonate what's left of mortgage finance."


"Giving the Fed more power is like giving the neighborhood kid who broke your window playing baseball in the street a bigger bat and thinking that will fix the problem." -Kentucky Senator Jim Bunning

Substitute mortgage bombs for baseball bats and you've got the picture.

One more substitution: Profit bombs for mortgage bombs, and you're current.

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Prices would come down to the sub-$200K range for higher end, bicoastal suburban real estate (was in the $800-$1M range two years ago).

I've always believed this as well. I have a buddy in Redondo Beach with a shack he paid $565k for 3 years ago. It's actually an old train depot, non-updated, with a completely unmatching contemporary addition to the back of the home for beds and bath. Weird stuff. But it's still comping in the neighborhood at high 400's, low 500's. Beach cities are less affected by the crisis as of course there are still people with a lot of money. However, given the local job area of the south bay, and the Redondo per capita income of $108k, I always told him most homes in this area should NOT be much over $300k. $300k is a LOT of money for a house. I grew up in the midwest, and $100k for a house was like "woah". Something in the mid $250's was where doctors live. It's about 25% higher today in the midwest, but these coastal prices are insane and it's all a leverged illusion.

I challenge a state effort to pull all the records of all homes, and see how many people are truly wealthy. I consider true wealth to be a nice, large, paid off home with money in the bank, and beefy consistent income. Which gives a rightfully earned "i dont care" attitude.

I do NOT conside "wealth" of the illusion of it, the Cali dream. Anyone who has their home leveraged to the hilt, or is paying 50% of their income to a mortgage, or is 1 or 2 paychecks away from failure, is NOT wealthy they are only 'hood rich'. Take away the posers from Cali and lets see whats left. heck, even 2 of the "real housewives of O.C." are losing their home from being over leveraged.

shouldn't this be labeled the "next bust"?

No Gibbie;
BOOM! As in blown up.

I'm not 100% positive, but I think that the last time 20% down payments were the norm was in the '30's. 20% just seems extreme and arbitrary. Why not 50%? Requiring 20% downpayments on modest houses would cause a complete (further) implosion of home values. I'm not being facetious - what philosophical principal makes 20% down the magic # versus 50% down? I agree with TMD that in my 17 years of hacking loans, 5% down loans have been relatively safe. Obviously more loans go bad as values are undercut - in part, by tightening underwriting rules. I'm sure if we required 80% downpayments, a lot of loans would go bad despite having had 20% down payments.

Cripes I sound like Kudlow arguing that MTM is causing the problem. At some point, though, tightening underwriting rules is like putting out the fire with gasoline.

well, i hate to admit it, but my daughter and her new husband got sucked up into the $8000 'first time home buyer' vortex...

incredibly, neither are first time buyers, however, her husband sold his condo over 3 years ago and that qualifies HIM as a first time buyer...they purchased a home in vinings (just outside of buckhead, GA) and while it's a very nice house and is below comps....i worry because they haven't sold their current condo (in her name) yet...

they felt the pressure to close by nov. 09 in order to get the $8K (home purchased in HIS name)

if they don't sell the condo before then, they will be stuck with 2 mortgage payments....(yes, i advised them to sell the condo FIRST and screw the $8K)

keeping fingers crossed.....

fortunately (or unfortunately, depending on how you look at it) they both have high income jobs and can handle the 2 payments, but if it comes to pass, what a waste!

Mortgageguymn wrote..

I agree with TMD that in my 17 years of hacking loans, 5% down loans have been relatively safe.

There is your problem. You have been hacking loans since the bottom of the last cycle and price rollbacks have not been present.

20% is a good number to allow the bank to grab and sell the house before their money is at risk. Granted, more is better, but 20% has been a good balance.

I would never write a loan at 80% LTV unless DTI was very low, income was stable, and P/I was under 3.0, and more like 2.2. But then again, I don't write loans.

FHA bailout is next huh.
How many trillions will it take to bail out the system, as everything is TBTF.
We are in for a lost decade for sure and kick the can down the bridge to nowhere.
Is there any type of bubble left to blow?
Or is that why they are creating the Cap and trade bubble?
This will go down as the greatest depression so far when and if it ever ends. WTF ?