Will FHA Mortgages be the Next Mortgage Crisis?
Nov 18th, 2009 @ 9:05 PM by Amber Nelson
Federal Housing Administration-backed mortgages are now the next market crisis waiting to happen, according to home builder Robert Toll, CEO of Toll Brothers Inc, the nation’s largest luxury builder.
“Yesterday’s subprime is today’s FHA,” Toll said today at a New York builders conference. “It’s a definite train wreck and the flag will go up in the next couple of months: Bail us out. Give us more money.”
Toll likely based his comments on reports last week from the FHA that its reserves ratio has fallen to 0.53 percent, well below the federally-mandated two percent designed to protect against fund default.
Another worrisome statistic is that 8.2 percent or 465,000 FHA loans are in default as of September, up from 5.6 percent one year earlier.
Toll also railed against the $8,000 first-time homebuyer tax credit, basically implying it is replacing risky former mortgage market practices.
“And now if you’re doing business at $120,000 and you’re given an $8,000 credit, and you’re only making the guy put down 3.5%, not only does he get the house but he gets some cash to walk away from the settlement table with,” Mr. Toll said.
While it is true that the FHA only requires 3.5 percent down payments and generally takes on lower-credit borrowers than other government-backed programs, the agency insists it does not make especially risky loans. Borrowers always have to document their income and the average credit score for borrowers has risen 65 points in the past two years.
And as far as the tax credit goes, Housing and Urban Development Secretary Shaun Donovan says, “You have to demonstrate that you have a source of cash that is yours; the $8,000 applies to additional costs beyond the 3.5%, so it’s not fungible [interchangeable] in that way.”
I guess it will all come down to whether the FHA does end up asking the government for bailout money or not. At this point, it is adamant that it has no plans to do so.
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.
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I think what is interesting regarding much of the negative press surrounding the FHA is that much of middle and higher tier subprime and “Alt-A” volume has been channeled into FHA paper.
This is result of two factors. One is that previous subprime and Alt-A lenders who previously wrote these loans are no longer lending, or have dramatically tightened their standards.
The second is that the government has mandated the FHA do everything it can to help consumers by providing more loans. There was a time when nobody wanted to deal with the FHA. Now, every mortgage broker is actively marketing their products because they can get their borrowers who previously were borderline or did not qualify for the best or “conforming” rates, approved via their FHA streamlined program. It is an easier approval than the remaining conforming shops, such as Wells Fargo, will give. It is also easier to close.
As a result, FHA is writing more paper, at riskier credit profiles, than ever before. This, coupled with an extremely ugly jobs picture has created the strong potential for yet another “prefect storm” of circumstances that could lead to trouble in the next several months. The government may have tried to solve one problem by inadvertently creating another.
With the mortgage market so politicized you can expect the fed to dump a lot more money into this problem. FHA loans which used to be a relatively small percentage of overall loan volume has become the main stay since the mortgage collapse. I understand the government wants homeownership but I just think the idea of being able to take on such a large amount of debt with 3% down is no different than zero down and interest only loans we are working through now. I understand that it may be hard for homeowners to afford 20% down at current home values. If this mean we finally allow home values to fall to more realistic levels then so be it. Yes it will be painful but we have to find a way to make it painful for the borrower to just walk away from a mortgage simply because they bet wrong.