My Outlook on FHA's Potential Changes

Date:December 11, 2009 | Author: | Category:FHA Loans

On a recent blog I did a while back, I wrote about how FHA is, bluntly speaking, in some serious trouble.

Well, earlier this morning I received an update stating that HUD asked Congress to raise FHA requirements up to 5%.

Enter FHA Taxpayer Protection Act of 2009…

Basically because of all the financial issues the Federal Housing of Administration has been having some $$$ issues, they are wanting (and rightfully so) to tighten up the guidelines, and this is a prime example of it.

The NAR (National Association of Realtors) president Vicki Cox Golder has testified to Congress and is saying to not make any sudden changes to the current down payment requirement because that would really hurt the housing market and borrowers ability to qualify for homes.

Honestly, what is another 1.5%? An extra couple grand in the STABLE housing markets and about an additional $5k+ in the high cost areas? Deal with it folks. Stop getting your “Mocha-Choco-Latta” Lattes each morning and put that money into a savings account.

I personally think that FHA should be changed as such:

  1. Down payment to 5% (increase it another whopping 1.5%)
  2. Change UFMIP to 2.5% (will increase net equity in property and assist in FHA capital reserves-see below)
  3. Bump up credit score minimums to 640 (with more demand, comes less supply- simple economics)

If you think about it with the current situation, the difference between the purchase price and the loan amount on an FHA loan is basically like the borrower is putting down only 1.75%. Now while the option of paying the UFMIP is available, many do NOT pay it up front.

Where does this leave the bank IF they foreclose?

1.75% net equity when trying to resale? Not that much better than 0%, and if you add attorney and Realtor fees in there, you’re in the red before you know it.

2.5% net equity isn’t much better by any means, however this would help the capital reserve amount increase by 30% and its just a small enough bump not to rock the market or borrowers.

Maybe I’m totally off, but again, just voicing my opinion.

What are your thoughts?

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Responses (0)

  1. James 5:42 PM - Dec 13,2009

    What are you trying to illuminate with your Micro-Economics graph? It does not illustrate your statments. In fact, it is nearly the antithesis reaction of FHA changes.

    Increase in Price will increase demand? It has been many years since my Econ 201 class, but increasing credit score minimums and increasing down payment requirements would have the reaction DECREASED demand. This is reasonably obvious. Higher requirements, albeit small, are still unattainable in the short term to a border-line approved borrower and anyone with a 639 score is lost demand. DECREASE is demonstrated as a move to the left D1 to D2. Your graph shows a positive movement. The corresponding equilibrium would show a decrease in price (down) and a decrease in supplied inventory S (left along supply curve). However, there is currently a substantial non-price specific supply: short sales and foreclosures. The seller is relatively immune after beginning negotiations with the lender. The difference between a short sale of $10,000 or $100,000 is irrelevant to the seller. Even 1090Int/1090 Misc income is presently avoided. This is relevant because I believe it creates an extremely horizontal Supply curve or low slope in econospeak.

    So, low S slope and movement of D1-D2 to the LEFT and negative = DRAMATICALLY LOWER Q (completed sales transactions).

    The graph used shows how an increase in demand has a subsequent price increase.

    In principle I agree that firm lending standards are a cure. However, a potential solution to our housing market is first time home buyers. The more of them we aggregate today, the larger the supply of future move-up buyers! Sure this is a 5-7 year solution. Half a decade isn’t particularly palatable with our immediate satisfaction society but it is a potential long term success that can work in tandem with other stimulating projects. Or we could just bring back 100% stated option ARMS.

  2. James 5:56 PM - Dec 13,2009

    I goofed on Supply and do not know how to alter:
    Supply that isn’t price sensitive is vertical. So an artificial change in demand by reducing the number of buyers will severly impact price. So much so there is a dis-equilibrium between what a buyer is willing to pay and what a seller (or the lender) is willing to allow.

    The greatest impact is secondary: in Portland, OR we have unlimited access to RMLS.com showing home addresses and listing prices. While the listings will state ‘short sale’, in very short order a prospective buyer will begin to believe the asking prices are legitimate and apply those value standards to legitimate sales offers.

    It would be like taking a bogus Amazon.com web advertisement showing an Apple Iphone for $10 and demanding the AT&T store sell it to you for $9 or you walk….. bad metaphor using electronics for a model….

  3. Tommy Xintaris 5:56 PM - Dec 13,2009

    James, this is a SIMPLE S&D Graph, and not intended to be a Monday morning eco class. I did not make it. I could have easily inserted a picture of Kermit the Frog, but I decided to go with pretty lines and colors instead.

    Since there is more demand of FHA these days which has resulted in more foreclosures, the supply of approved buyers will potentially grow shorter with the newly presented guidelines by HUD.

    The solution is not first time homebuyers.

    The solution is a stable job market, which as an economics major myself I’m certain of, that will allow FTHB’s or any buyer the ability to pay their monthly liabilities.

  4. James 7:20 PM - Dec 13,2009

    I should have asked first.
    BS Economics myself and owner of private Mortgage Broker company the last 13 years, I embraced the opportunity to map out a S&D curve as it applies to our present situation.
    Agree with you, the result of the solution is more FTHB. Solution is jobs and herd optimism.

    What I find personally amazing is how well our system responds to expansion and how intolerant it is to retraction! We focus so much on up and to the right that the pain of down to the left is ignored until experienced.

    *Your statement +FHA = +Foreclosure is referring to the critical number of FHA that end in foreclosure therefore the more FHA = more foreclosures?

    Thank you for your dialog and best wishes in 2010.

  5. Molly Phillips 5:49 PM - Dec 15,2009

    First of all I would like to say that I am totally against the 5% down payment requirement change for FHA. It is easy for you to say quit going through StarBucks in the morning and save a little more, but you don’t live in the city that created Bankruptcy in thier courts. We have buyers that have worked hard to get their credit scores back in the 700s b/c they filed bankruptcy since our commercials and all their friends made it seem so easy. Our builders are even filing bankruptcy to dump their inventory of new homes. I am all for the higher credit scores and even showing reserves somewhere but a 5% down payment for a buyer in the FHA price range is going too far! Our job to sell houses is hard enough now! Then add the new RESPA laws in with the 5 page HUD, not to mention trying to get FHA approval on Condominiums now and we might as well go get jobs as apartment managers! As long as I have mentioned the word apartments, that is another issue with the 5% down payment. Get a buyer who wants to look for something before their lease ends & find them the house of their dreams and they have to buy it now since their are multiple offers. Oh, but wait! The apartment complex won’t let them out of their lease a month or two early, so if they want to get out of it they have to pay an extra $1000 or so and on top of that the apartment manager is going to charge them a redecorating fee of another $1000! Or let’s look at it from another perspective, the buyer’s lease runs out and you just got an accepted offer for them on a house, but it won’t close for another 30 to 45 days so they have to go month to month on thier rent at double the monthly rent they were paying so they have to use the savings for that. I say bring back the Seller paid Down Payment Assistance Programs but make sure there have stricter guidelines, for instance higher credit scores, longer job history, must stay in the house for 5 years, etc…
    We have got to get these foreclosures and short sale homes sold! They are really hurting property values! The government needs to offer some kind of tax incentive or a lower down payment if the buyers buy a foreclosure or short sale (as long as it can pass an FHA inspection).

  6. Pierre 10:26 PM - Dec 15,2009

    I’m not an eco major, so please explain to me how:

    a) Increasing the FHA down payment, thereby reducing qualified borrowers, will be good for me, the guy who now has a smaller pool of buyers looking to buy his house? This will increase demand for my house and reveal some appreciation?

    b) Increasing the UFMIP will increase net equity? Won’t this decrease equity since it typically gets financed?

    Thank you for clearing this up for me (and next time, insert the Kermit the Frog photo – joke).