The If and When of Recovery (video)
It's worth taking a look at this recent Wall Street Journal interview with Real Estate expert John L. Burns.
Mr. Burns confirms a lot of what I've been predicting for months now for the 2010-2011 Atlanta real estate market.
In the video he explains why FHA loans and migth contribute to a prolonged recovery.
Here are a few reasons why 2010 will not be the year of recovery:
**We are likely to see what economists refer to as a ‘W’ shaped recovery…recent news and the surrounding economic environment supports us being in the first leg of the "W"… going up (only to come back down in 2010)
**FHA, with it's monstor growth (2% of the market in 2007 to over 23% right now), has become the new ’sub-prime’
**Without continued government intervention (tax credits, FED purchasing mortgage backed securities to keep interest rates artificially low, etc) the real estate markets will see a massive decline.
Check out the video and share your thoughts:
Hi Josh -
Interesting video. Thanks for posting it. I agree quite a bit w/ John Burns' assessment - that we're in for a decline if the government stops subsidizing mortgage rates. That said, I don't see the government ending this subsidization.
I do disagree with you somewhat that FHA is the "new sub-prime." While it is "sub-prime" in today's standards, it's very far away from the B paper loans pushed through from 2001-2007. During the sub-prime craze, we saw 100%, light doc loans for people with 620 credit scores. Today, the best you'll do is full doc, 3% down with a 620 credit score, plus other qualifying criteria. The simple requirement of documented income puts today's FHA programs in a much lower risk bracket. Couple that with the requirement of buyer "skin in the game" (albeit small) and they're even more conservative.
Regardless, great post. I enjoyed the video.
I need to correct myself. Today's FHA programs require 3.5% down, vs. the 3% required prior to 2008.
You're right about the differences between today's FHA buyer and the B paper issued to borrowers with similar qualifying credit scores (620), but I think what John Burns is attempting to say in the video is that in their effort to prevent further declines in the housing market, FHA has grown too fast and too sloppily. And that this, along with the FED buying hundreds of billions (if not trillions) in mortgage backed securities to keep interest rates low and tax payers subsidizing the purchase of homes by first time and no move up buyers with tax credits, is a problem.
I agree that the government will continue to do what it can to put a bottom under housing prices, but the real problem occurs on the second down leg of a W shaped recovery. The process has a tendency to eat itself ... meaning if the job market remains weak, foreclosure remain high and prices continue to slide then the FHA loans will have an even higher rate of default.
Though not mentioned in the video here are the key reasons John Burn's sites for his opinion on why FHA is volatile and could be the next shoe to drop:
1. Growing Pains: FHA lending has propped up the housing market since credit tightened and seller-funded down payment assistance went away last fall. The staff required to manage and oversee the tremendous growth has had difficulty keeping pace.
2. Subprime Wolves: Thousands of mortgage brokers who focused on the subprime market rebranded themselves by shifting into the FHA-backed business. Approved FHA lenders grew from just over 9,600 at the end of FY07 to nearly 14,000 today, according to HUD.
3. Shifting Distribution: Last November's housing bill increased the size of the loans that the FHA could guarantee. As a result, FHA lending in high-cost states rose rapidly - California, Nevada and even Florida saw their percentage of originations spike. But these are also the states where collateral value has declined the most.
4. No Guard Dog: It's hard to imagine, but the FHA has no Chief Credit Risk Officer, according to several industry experts including Ann Schnare, a leading FHA and mortgage finance expert with Empiris LLC. A HUD source says they are monitoring risk, however, and FHA Commissioner David Stevens expressed his personal concern in a USA Today article in September of 2009.
I feel like any direct comparison between b paper light doc loans (now non-existent) and today's FHA loans is disingenuous. Light doc b paper was an invitation to commit fraud, and most LO's/borrowers didn't see it as fraud - many AE's (working for the banks) actually encouraged it. "Here's what you need to state your income as..."
1) Growing Pains: Bear in mind that the FHA merely insures the loan. You still have underwriters verifying the FHA criteria (from now very conservative banks.)
2) Subprime Wolves: I agree that there will always be a certain % of unscrupulous brokers/bankers willing to commit fraud by falsifying tax returns. However, falsifying tax returns is much more intimidating than merely advising a borrower to lie on their income statement, and has absolutely no plausible deniability.
3) Shifting Distribution: The B paper loans of the past typically maxed at the conforming loan limit of $417k. FHA limits are below this amount.
4) No Guard Dog: Definitely needed. But I'll defer to my point #1 - the requirements are underwritten by the lenders, who must prove the criteria were satisfied in the event that the loan does default.
I Googled around for FHA default rates and couldn't find anything. I'd be very interested to see the default rates on FHA loans vs. 01-07 b paper. Bearing in mind that FHA criteria have tightened, I can only see the default rates on FHA loans dropping.
The only point I can't argue with is "unemployment is high and could go higher." While I think the unemployment rate is trending to a flatline, and most economists agree that we'll see marginal decreases in the rate in 2010, I do agree that, if the rate goes up, we'll see more mortgage defaults (both FHA insured & uninsured.)
A recent article on Bloomberg.com sites "Record Defaults" for FHA loans.
The article, in which Toll Brothers CEO Robert Tolls calls FHA a "train wreck" goes on to say:
The FHA said 456,000 of its loans, or 8.2 percent, were in default as of September. That was up from 5.6 percent in September 2008.
The default rate for loans tracked by the Mortgage Bankers Association was a record 9.24 percent for the three months through June (2009), the most recent period for which data is available. That was up from 6.41 percent a year earlier.
You can read the article in it's entirety here: http://www.bloomberg.com/apps/news?pid=20601103&sid=aRsDeHu7ywas
The discrepancy in FHA default vs. total average default illustrates my point. The FHA default rate is actually lower, indicating that they're above average loans. FHA defaults increased by 2.6% while the total average increased by 2.8%.
It is unsettling that mortgage default rates are increasing, even though we're getting further away from the irresponsible lending prior to 2008. My best guess is that the jobs market is playing a large role, as well as owners walking away from homes underwater.
Great video! I would like to add to the conversation, and I think what you two have said is excellent. The "sub-prime" fiasco is something that hurt our lively hood, and with FHA, just like any other loan, you can't pay it if you don't have income coming in. Eric made a great point, default rates are increasing, but I don't think it's because of faulty lending, as much as it is the job market. People losing jobs can't pay a house payment.
There is also the people out there that haven't technically lost their jobs, but have been getting fewer hours over the last couple years. Which, eventually is going to cause people to struggle to pay the mortgage, and the snowball keeps rolling. Great discsussion!
Lisa, thanks for your comments. I think you really speak to the core of the issue. A so called "jobless" recovery is not good for housing. A recent article CNN money article notes that 25% of homeowners are "underwater" (owe more on their home than it is worth) and another states a record 9.64% of homeowners are least one month behind on payments. It's this problem on "main street" that is the heart of the worlds economic woes. I'm not so sure an $8000 tax credit (soon to expire) is going to solve the problem.
Maybe we should pray for hyper inflation?
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