Friday, October 08, 2010

FHA and Home Occupancy as an Entitlement

The FHA used to only represent a small portion of the US mortgage market.  FHA buyers were perceived to have poor credit and use this government program (essentially a subsidy) to enable them to purchase a house that they would live in, thus increasing the "social mission" of increased home ownership in the USA.  However, after the meltdown in securitized mortgage lending in 2008, the market for non FHA loans essentially evaporated and the FHA has moved from a small percentage of the mortgage market (maybe 5%) up to as high as 90% in some regions among eligible residences.  There are limits on FHA buyers, mainly that the house / condominium can't cost more than $369,000 (or $729,750 in some high cost markets like CA and NYC) and that the owner needs to live in the house (not for 2nd homes).

In Chicago many of the condos are below the threshold where FHA financing makes sense and so the issue of whether or not a particular unit is eligible for FHA financing is becoming more important in the marketplace.  Buildings advertise in large letters if their condominium is eligible for FHA financing (on units that qualify under the cost threshold above, of course).  At some point it is possible that buildings that cannot get FHA approval (they have other criteria regarding reserves, commercial tenants, etc...) would be at a severe loss when trying to sell out for the first time to owners or for existing owners to resell to new buyers.

There has not been a lot of discussion on whether or not it makes sense for the Federal government to essentially nationalize the mortgage industry, but that is what is occurring today.  FHA loans are now the only loans in town since their low down payments and rock bottom interest rates drive out competitors at their price levels.  And it is only a matter of time before the FHA raises their cost limits which would further their dominance in the market, leaving only the high end for other types of mortgages.

I also believe that wise developers will tend to "cluster" their pricing right around the FHA limits.  If you have a $450k condo, that is a bad price point if only $384k can be financed, so shrink them down a bit or reduce amenities to hit that price point. As soon as the FHA raises their limits, then the mid-tier condo market will move closer to that pricing point, over time, as developers realize the power of FHA and the limited market for non FHA loans.  This will take a while and be subtle because development is dead now so little is coming onto the market, but I'll bet you'll see this in the next wave.

On a parallel thread, the banks that are attempting to foreclose on individuals who are seriously delinquent in their mortgages have been facing rough times lately.  This article from Fox News describes not only a recent veto of a bill to facilitate electronic notarization of documents but other issues that are slowing or even halting bank foreclosures.  Per the article:

Three of the nation's largest mortgage lenders – Ally Financial, JP Morgan Chase and Bank of America – have suspended foreclosures in 23 states after reports revealed that lenders were signing documents without reading them or filed inaccurate paperwork. That has led to several lawmakers and civil rights groups, including the NAACP and the National Council of La Raza, to call for an investigation into the foreclosure process and a suspension of all home foreclosures.
As the Federal Government nationalizes the mortgage market, you can soon see the writing on the wall that foreclosures will be protested against just as a special interest group would protest any other entitlement change.  Since it is a government program, why can't they just bend the rules for the poor or a special community, especially one that is politically connected?  While I have seen conflicting estimates of FHA losses and when they will start to need money from the US Treasury to cover the program (they had been self funding all along until now) the dire mortgages from 2007-8 are starting to go sour which will definitely raise loss rates overall for them.

I'm sure someone thought all this through in conspiracy-land but really the threads are only starting to become evident as the FHA drives out all the competitors with their low rates and low down payments on the one end, with cost levels rising over time which will allow them to control a larger portion of the total market.  Developers (smart ones) will also tend to build units that qualify for FHA loans in the first place.  Then when a foreclosure comes - use protest politics.  And FHA losses become everyone's responsibility, not the borrowers.

Now your own home is an entitlement.  You can see where this ends up.

Cross posted at Chicago Boyz


Overload in Colorado said...

Does this mean the Gov't will need a lot more employees to monitor these loans? Do they resell any of these loans? Will it then be the Gov't who have to foreclose and evict? Are they then the owners of the property and may try to resell at (below?) market value?
Living out west, the Gov't already owns a lot of land, and they don't seem to want to sell any of it.

Gerry from Valpo said...

Good stuff, Carl. In a few weeks we can vote all those bastards out.