The Federal Housing Administration is planting the seeds for the next real estate collapse. As the recovery process continues, FHA is marketing homeownership to families who can’t afford to repay their loans, setting up these families for failure. In a study of 2.4 million loans insured by FHA in 2009 and 2010, 9,000 zip codes were identified in which 1 in 7 borrowers are projected to lose their homes – and savings – to foreclosure. How is this not recognized as stupid? Or is this simply part of the “keep throwing money at the problem” strategy employed by Washington? At this point, FHA is estimated to be 46-65 billion dollars undercapitalized; how long before that road runs out?
The American Enterprise Institute pulls no punches about the mismanagement of FHA and the corruption of the program as a whole; once designed to aid working class buyers they now see it as the foundation for a second real estate disaster. Metro Atlanta, especially south metro, has multiple zip codes where the default rate on FHA insured mortgages is as well over 25% and a few over 30%. Compare that to a private sector default rate of less than 4%. Many zips have an incredibly high percentage of FHA loans with FICO scores below 660; the data shows many over 50%, a few into the 60% range. These are unqualified buyers.
FHA apparently has little to no concern that many of their borrowers cannot actually afford to own and maintain a home or cannot afford the price of the home they have selected to purchase. Lenders could care less as FHA loans are insured by the taxpayers. If a borrower with an FHA loan defaults, who cares? The lender can recover the entire value of their loan from the FHA; there is zero lender risk. Many of these loans are written in areas where investors are bulk purchasing homes, making the market appear stronger than it actually is – another misleading interpretation of the data.
FHA loans are underwritten to encourage trouble. A borrower’s “debt-to-income-ratio” is calculated using the gross income amount; take home pay that is actually available for a mortgage payment isn’t used. Consequently, FHA borrowers are commonly encouraged to purchase “as much home as they can qualify for” rather than considering other expected living expenses, unplanned expenses or savings. In short, they are encouraged to overspend.
Fees associated with FHA mortgages are notoriously high in spite of their reputation as the mortgage of choice for lower income borrowers. Even at today’s lower interest rates, FHA loans carrying a 30 year term with a 5% down payment will cost the borrower about 2.5 times the total amount borrowed over the life of the loan. The cold math is clear; it’ll take about 12 years before you pay more principle than interest, since most FHA loans don’t get close to that owners are often shocked to find out how much they still owe on their home loan. A 100K 95% LTV will cost around 250K over the full 30 year, 360 payment period. How many sellers will have positive equity or even break even?
FHA has been without a director for about three years…coincidence? The National Association of Realtors continues to encourage FHA to keep lending especially after the crash eliminated most private insurers and lenders. Some say appraisal underwriting policies are more lenient as well when compared to conventional reports. Estimates are that FHA is operating with an estimated 46-65 billion dollar shortfall as loans continue to be made, essentially operating with no visible means of support. It appears that Washington’s answer lies in simply printing more money or just arranging for a tax payer bailout. Let the recovery continue!