p.s. nice shout out to Zerohedge Rick!
I used to tease that eventually the Fed will take us to 3.5% mortgage rates because things are in such bad shape, but this was actually broached in the video. Sigh.
On that subject I am posting a story on how the FHA is now offering loans for luxury condos in NYC. I posted a similar story last year on the San Francisco market. [Nov 20, 2009: With FHA Help, Easy Loans in Expensive Areas - Barney Frank Pushes for Higher Permanent Limits, Approaching $1 Million] Yes the same FHA that was designed to help the lower end buyer get his/her part of the 'dream'. There are so many amazing things in the story I don't even know where to start but it shows you the dependency I outline above. Literally you can HEAR the dependency in various quotes throughout the story. Scary fact of the day - FHA does not even have a FICO score requirement. To combat that they are now thinking they will use 500. Which will eliminate the bottom (wait for it) 1% worst risks. Whew! That is some sound risk management!
- The Federal Housing Administration agreed in March to insure mortgages for apartments at the 98-unit Gramercy Park development, known as Tempo. That enables buyers to make a down payment of as little as 3.5 percent in a building where apartments range from $820,000 to $3 million.
- The FHA, created in 1934 to make homeownership attainable for low- to moderate-income Americans, is providing a lifeline to new Manhattan luxury condominiums after sales stalled. Buildings featuring pet spas, concierges and rooftop lounges are applying for agency backing to unlock bank financing for purchasers. The FHA guarantees that if a homebuyer defaults on his mortgage, the agency will pay it.
- “It’s not an accident that the FHA is offering this -- not private lenders,” said Christopher Mayer, senior vice dean at Columbia Business School’s Paul Milstein Center for Real Estate in New York. “An unfilled condominium complex is not the kind of thing that a bank looking to rebuild its balance sheet on real estate is looking to do.” (translation: what fool in the private sector would make such a loan? Thankfully there is 1 great fool who has no control over his/her money - the U.S. taxpayer)
- In New York City, the priciest urban U.S. housing market, the FHA insures loans of as much as $729,750, and permits buyers to borrow up to 96.5 percent of the price. (aka "low to moderate income" borrowers)
- “Something has to happen for this product to be marketable,” Miller said (translation - what idiot would fund this project? Oh wait, found one!). “I just find the whole thing ironic that FHA is providing financing for luxury housing.”
FHA made as many loans in Q2 2010, as it did all year as 2007 as the amount of people who could get a "normal" loan (i.e. the type you need to pay back) diminishes in Cramerica.
- Nationwide, the FHA insured 21 percent of all mortgages made in the second quarter, or $71.4 billion worth of loans, according to Geremy Bass, publisher of the Inside FHA Lendingnewsletter. That’s close to the $79.5 billion total value of all FHA-backed loans in 2007.
- Nine percent of all FHA-insured loans were 90 days or more past due or in the process of foreclosure in the first quarter, compared with 7.4 percent a year earlier. (2nd derivative improvement? Not so much)
But no worries people! I am sure with NO FICO score minimum this will turn out well.
- The agency doesn’t require a minimum credit score for the mortgage insurance.
- The FHA is considering a minimum required score of 500, according to a notice the agency filed in the Federal Register on July 15. A person with a 500 rating is in the lowest one percentile of credit scores nationally and was likely delinquent on several accounts in the last year
I have not posted a story on FHA for a long while, effectively I've been beaten over the head to the point I am just laughing go forward at all the things headed our way as we not only do not learn from recent past, but repeat it. I had a series of posts warning on Fannie, Freddie in 2007 and early 2008 and little help that did - in fact the politicos put more risk on Fannie, Freddie in early 08... 6 months before the implosion. So it's all just spitting in the wind... you can only laugh from here. (or else you cry)
If you are not familiar with what FHA is doing, we now have essentially created a government sponsored subprime lender. Even those in the housing industry say so. [Nov 18, 2009: Toll Brothers CEO - "Yesterday's Subprime is Today's FHA"] Since we are running out of credit worthy Americans who can actually bring a deposit down of 5%+ the entire housing market rests on FHA (and Fannie, Freddie). We used to call these people new "home owners" a very bad word (renters). But almost anyone can be a homeowner in the new government backstopped Cramerica - little to no skin in the game, if housing values go up you win, if they go down, you walk (after living in the property 18-30 months "rent free") i.e. you still win. How did that work out the last time around? [Feb 1, 2010: 2 Graphs Showing Part of the Reason for the Christmas Eve Taxpayer Massacre]
A 9% default rate on FHA loans is just the beginning - can you imagine if these $700-$1M+ homes fall in value even 10% what a mess we have for the future? But no worries - it is only taxpayer money and worse comes to worse we go Banana Republic style and have the Fed buy the mortgages at face value, and no one loses. It's "magic"!
Anyhow, I am attaching myself back to the Matrix. It's all good.... just make it all go away (and push the stock market up..thank you).