Deb Espinoza's Real Estate BLOG: The Feds now admitting that the government backed housing market in trouble.

I have been worrying about the fact that FHA is the "new" creative mortgage for today's buyers. Although the loans are not near as creative as the old teaser rate loans and liar loans, I did have cause for concern- and now the government seems to be letting on that there may be a problem. FHA's requirements for borrowers, although more strict than the past 'breathe on this mirror' loans, have up to this date allowed credit scores in the 500's, low down payments of 3-3.5%, allowed 'gift' money for down payments, and seller contributions as high as 6%. When you take all this into consideration you still MAY have a borrower that has not handled their credit well, and still had none of THEIR skin in the game (evidenced by "gift" funds and seller contributions); quite frankly the only difference from the old easy loans that created most of this crisis we are in is that there has to be proven income, no more 'stated income'. The thing is, in my opinion, the Stated Income loans were created for self-employed borrowers who in most cases had heavy write offs for tax reasons and therefore their tax returns did not create an accurate picture to prove income for loan qualifications. For example- standard underwriting would allow for adding back in such items as "depreciation' or home office expense to the business owners bottom line income, but Business owners may write off close to 100% of gas expense, or vehicle payments etc. and generally those were not added back in to create a real picture of income and thus disqualified them from a loan they could really afford. This Stated Income loan was created for this reason; and it just makes sense. Business owners with a succesful proven track record in business, evidenced by great FICO scores and cash and assets are now unable in most cases to get a good loan because of misuse of these loans in the past by those who should never have been allowed to use them. Now, what could be a great resource of purchasers for a lot of these foreclosed properties are unable to qualify for loans to purchase these properties for investment. Another example of the government not seeing the "big picture'.

The problem began when Stated Income loans were made available to everyone- even salaried or hourly workers. A teacher making $45K a year may have been creatively revamped to be an "Educational Administrator" with a Stated Income of $110K, this is just one example of what I know was done on a regular basis- and encouraged by account reps at lenders so the loan would be approved. Thus, the nick-name "Liar Loans". It was just TOO easy, and everyone was doing it.

The other thing about FHA loans that really puzzled me was the debt ratio, ratio of house payment to income (including taxes, insurance and HOA dues), considered the 'top end ratio" and then the calculation of all debt; housing, autos, credit cards, student loans, to the income; refered to as the bottom end ratio. In the hey day of easy loans these ratios were as high as 55%, which didn't leave much for taxes, food, gas and other necessities that aren't calculated into these numbers. So when I saw that the FHA loans were allowing for a much higher debt ratio than all the other loan types- 50% in some cases; I'm still thinking- What are they thinking?? Isn't this STILL Cause for Disaster?? and apparently it is and was.

Recent news is that not only are Freddie and Fannie still in trouble, but FHA backed loans are now a concern. The Federal Government was responsible for 95% of all new home mortgages in the last quarter of 2009. The Federal Government backed $390 Billion in new mortgage loans just in Q4 2009. Freddie, Fannie, VA and FHA stands behind 95% of those loans, when just a few years ago that figure stood at just 40%. Federal Reserve Chairman, Paul Volker, states that our Nation's home mortgage market is in 'trouble' and will have to be 'restructured'. "It is totally dependent on the government and should not be. That's going to have to be reconstructed."he says. While stating that this situation is a big problem, he also states that it can't be fixed in the next year. Volker states; "Its like saying we're going to make some improvements to the Titanic after it has hit the iceberg." Okay, so if you interpret this statement as it was made, we are already SUNK and need to build a new ship.
So do you think now may be the time to get input and ideas from those who actually work in the business and understand how it works and what will and won't work in building the new ship ??

Obviously the new ideas for tightening up FHA underwriting is not enough. Their ideas include: raising the down payment to 10%  IF your FICO scores are below 580; lowering the seller credit to 3% maximum, and then in order to get more money into the Fed Govt. Mortgage Insurance coffers- raising the percentage of upfront FHA insurance fees to 2.25% (I think it stands at 1.75% now) and raising the monthly cost to the borrower for the FHA insurance backed loan as a percentage of the mortgage payment. Ths doesn't much solve the fact that these loans are still being offered to those that have proven mis-management of their credit; which I feel in reality, is a huge indication of their future money management. Also that most of them are employees, most with no cash reserves in the bank after they purchase their home, in a time when there is still has an alarming amount of layoffs every month.  It's not easy to teach an old dog new tricks- quite frankly I often wonder just how many of these people losing their homes to foreclosure are repeaters from the mid to late 90's. Perhaps some financial education would be in order, and the government should be the first in line to be educated.