Is FHA 3.5% Down Payment Toast?
As we noted here in a post yesterday, HUD Secretary Shaun Donovan and his team have Federal Housing Administration mortgage insurance policy high up on their To-do List.
In an analysis on Big Builder Online, editor Sarah Yaussi gets perspective from home builders on their biggest areas of anxiety, even as their lenders raise the barriers to entry for home buyers as a reaction to FHA’s already intensified pressure on banks.
Here’s an excerpt:
Eric Lipar, CEO of Texas-based entry-level builder LGI Homes, for example, said that his staff recently did some analysis to find out how many of their buyers this would’ve been unable to qualify for FHA financing if the required minimum credit score had been 640 rather than 620. The answer was 7% would not be able to close under those more stringent credit requirements. Not an overwhelming percentage but hardly insignificant either. I’m not sure any builder would be psyched about that much of their business being eliminated in one stroke of a pen.
“Every time that [credit score] number jumps, you take potential borrowers out of the market,” he said.
However, Lipar wasn’t sweating that part of Donovan’s testimony. After all, FHA’s underwriting guidelines have never spelled out a minimum credit score; lenders-and investors in the secondary mortgage markets-have largely called the shots when it comes minimum credit scores through the establishment of credit overlays. In fact, according to Lipar, the bar on minimum credit score has been steadily rising since 2008, so Donovan’s pronouncement appeared to him more as formalization of what was already happening in the marketplace.
However, what does worry Lipar and others like him is the idea that some of Donovan’s other proposals–specifically the increase in a down payment requirement, the reduction of seller concessions at closing, and the increase in insurance premiums–might go into effect in conjunction with one another at precisely the wrong time. Wrong time, of course, meaning just as the federal home buyer tax credit is set to expire.
So what are the real odds HUD will fiddle with the 3.5% minimum down payment?
Calculated Risk, who shows superior insight into what might motivate a policy change of this nature, is betting no. The money quote:
I think the most likely changes are higher insurance premiums, lower seller concessions, and tougher standards.
For What It’s Worth
Myth or reality, it’s widely held that real estate–including developers, home builders, brokers, and, of course, lenders–hi-jacked home appraisals for a few years BHC [before the housing crisis]. Easy money and Ponzi-dynamics rewarded all comers, and punished almost no one.
That is, except those who may have felt they left money on the table rather than in their pockets.
Appraisals fell somewhere amid a keiretsu-like quid pro quo complex, train-linked to the juggernaut of home price appreciation. With each new phase of a subdivision, market demand driven prices escalated, and banks approved greater and greater loan amounts based on higher appraisal amounts, supported–in Catch-22 harmony–by higher comps… All for parity products in the same submarkets.
For as long a period of time as there were greater fools pouring into the homeownership pipeline, everybody collected. The rules were simple: Make more money.
In enough cases to keep NY State Attorney General Andrew Cuomo’s office busy for more than a year investigating mortgage frauds, home builder/developers’ preferred or owned lenders muscled appraisers into writing numbers that inflated home values, stretched home buyers into loan territory they never should have taken on, and, inevitably, stressed the financial system with debt no one will ever repay.
The truth of the story makes it a classic case of rotten apples, and what needs to be done about them immediately. There are always rotten apples. Just one or two will work like a contagion in a big basket of apples.
Here’s an investigative piece about real estate appraisers who are the bad apples, from The Center for Public Integrity’s Joe Eaton:
A Center for Public Integrity investigation of the appraisal industry in California and Florida, two of the states hardest hit by foreclosures, found that since 2005, one in six appraisers whose licenses were revoked or surrendered kept their real estate sales or broker’s licenses. The violations that led to these appraisers losing their licenses ranged from simple incompetence to fraud committed for personal financial interest. Yet they slipped through the cracks of a loosely maintained system of state oversight, which allowed them to continue working in the real estate industry negotiating sales to home buyers, who likely know little about their pasts.
Equally, bad apples showed up elsewhere in the lending pipeline. Sometimes, it was mortgage originator, sometimes it was a home builder sales manager under pressure to make a monthly bogey during the boom. They bend the rule, and then they bend it a little more.
Bad apples are inevitable. Our cautionary tales in business, however, have not only to do with bad apples, but with accountabililty around them. If there’s a bad apple in our midst, or more importantly, reporting through to our own management, who “owns” the consequences of his or her actions?
Big Builder editor Sarah Yaussi probes the impact of regulators’ new initiatives to right the wrongs in the home appraisal system in her “Appraisal Angst” cover story in the current issue of the magazine.
The code, which went into effect May 1, was borne from an agreement between Fannie Mae, Freddie Mac, the Federal Housing Finance Agency (FHFA), and New York attorney general Andrew Cuomo. It forces lenders who want to sell their conforming loans to Fannie Mae and Freddie Mac to follow new rules designed to ensure greater appraiser independence and more honest home valuations.
However, home builders and other critics have complained that the code is overcorrecting for boom-time sins, turning home price inflation into deflation. Backlash from the new code has grown shrill enough to reach ears on Capitol Hill. On June 25, Reps. Gary G. Miller (R-Calif.) and Travis Childers (D-Miss.) introduced H.R. 3044, a bill that would place an 18-month moratorium on the new code.
Cuomo and the regulators are setting themselves up as the heroes. They would have us believe that all of residential real estate is a basket of infected apples, the villains indistinguishable from the perpetrators.
In correcting a deficiency, policy creates new problems, and those problems redound directly to those who are trying to sell homes, new and used.
The two big stumbling blocks now are, what else? time and money.
Money, because new homes are getting comped with used homes slogging through foreclosure absorptions. Appraisers take a square-foot-is-a-square-foot-is-a-square-foot attitude toward a submarket, whereas a seller will be quick to say his 2,200 sq. ft. place is night and day different from that of a 2,200 sq. ft. foreclosure sale that may have been damaged and vacant for six months.
Time, because these days, a fair number of deals hang in the balance of coming through when they’re expected to by the owners, or falling through altogether.
We’ve seen home builders hold the swimming pool, hold the granite counter tops, hold the “better” window set as they draw toward the finish line to deliver a new home. That’s because they don’t know until the appraisal comes through what the home in that location is going to get bank approval for.
Here’s wisdom from a friend on the issue:
The more I think about the whole appraisal issue the more I recognize that it is fundamentally flawed and needs to be completely rethought. It’s not merely an issue of whether or not foreclosure sales should be counted among comparable sales. The fact is that the intrinsic flaws were not really obvious or serious while the market was strong and growing for the last fifteen years or so. But now , using appraisals as they are presently conducted as the only basis for determining house value is totally inadequate. The analysis of the various comparable sales is far too simple and does not properly identify the components that create value, i.e. a kitchen can be worth $10k or $100k, but that level of detail is not part of an appraisal. Also, most appraisers’ qualifications are inadequate to complete the quality of appraisals that are required, not are they properly compensated. How much time and effort can somebody expend when the fee is less than $500.00. Replacement costs, propely discounted, have to play a bigger role, and the parties (sellers, banks etc.) have to have more transparent roles/opportunities to contibute to the valuation process. It’s going to be very difficult to change the system with all of the entrenched interests.
Difficult is right.
Still, one of the hardest things to change is what happens when there’s a bad apple in the basket.
Banking’s Kramer Vs. Kramer: Wells Fargo Sues Itself
First and second mortgage lien hell hath no fury like oneself scorned.
A reader of Calculated Risk’s blog (Rama) brought this clip to wider attention.
From FoxBusiness: Wells Fargo Bank Sues Itself (ht Rama)
… I could not resist asking Wells Fargo Bank NA why it filed a civil complaint against itself in a mortgage foreclosure case in Hillsborough County, Fla.
…
In this particular case, Wells Fargo holds the first and second mortgages on a condominium, according to Sarasota, Fla., attorney Dan McKillop, who represents the condo owner.As holder of the first, Wells Fargo is suing all other lien holders, including the holder of the second, which is itself.
… court documents clearly label “Wells Fargo Bank NA” as the plaintiff and “Wells Fargo Bank NA” as a defendant.
Wells Fargo hired Florida Default Law Group., P.L., of Tampa, Fla., to file the lawsuit against itself.
And then Wells Fargo hired another Tampa law firm — Kass, Shuler, Solomon, Spector, Foyle & Singer P.A. — to defend itself against its own lawsuit, according to court documents.
Wells Fargo’s defense lawyers even filed an answer to their client’s own complaint.
“Defendant admits that it is the owner and holder of a mortgage encumbering the subject real property,” the answer reads. “All other allegations of the complaint are denied.”
Your TARP money hard at work …
That’s only the start to the fun. The ”comments” to Calculated Risk’s blog post begin roughly at “Can you perjure yourself?” and “All banks are equal, but some are more equal than others…” and on and on for a good 30 minutes worth.
We knew it was only a matter of time before the expression “I forgive myself” became currency.
Stop Making Sense: Nationalization a Question of When and How Much, Not If
CNBC snags minor celebrity NYU economist Nouriel Roubini for a conversation about the latest–a four-bagger–bailout for AIG and what it means.
It turns out that we–those who write checks to Uncle Sam on a regular basis–are on the hook for about $250 billion in counter party risk for AIG.
It’s almost unimaginable how many kegs you could get for all that counter party risk.
Another Play to Stabilize Home Prices: Uncle Sam Buys 2 Million
The scary part about this idea is that it’s one of the more heavy-handed policy intervention notions one can imagine–the government buys 2 million existing for-sale homes at a mean national pricetag of $170K per, or a total of $340 billion. Only its author claims that it is a free-market plan, because the U.S. Treasury makes its money back from the resale of homes into a putatively stronger selling market.
Here’s the gist:
The US commits to purchase up to two million homes (beginning with the 770,000 currently foreclosed) at the current market price.
This purchase will reduce the inventory of homes on the market to just 1.7 million, which is the correct number for a healthy market (3-4 month supply). Ending the supply glut and removing foreclosed homes from the market will restore the balance between supply and demand, and so restore real estate values and mortgage security, permitting refinancing or sale of homes as necessary. The current median home price nationally is about $170,000, which is a healthy price when measured by both historic trends and median household income. So now is the right time to correct inventory. Purchasing two million homes will cost about $340 billion at the median price, but the homes could be sold again into a healthy market over several years at a likely profit that covers management, maintenance, and policing. Correcting the inventory will also put builders back to work answering renewed demand. Meanwhile, having a reserve of up to two million homes will forestall another round of speculation while we enjoy record-low interest rates.
The theory intrigues one and its designer –Kevin Parcell, who pasted his idea in as a comment to NY Times’ columnist, Princeton economist and Nobel prize winnter Paul Krugman’s “Stress Test This“ blog post yesterday–has a data-rich position that makes this straightforward plan seem almost too simple. Which it is.
It doesn’t count for the stampede of foreclosures that would erupt the moment Uncle Sam started trolling the real estate landscape looking to buy up the deeds, first of foreclosed homes, then of buyers bent on getting out of their obligations.
Our problem is that we need ground-up positive psychology to counter negative sentiment due to worsening economic conditions. What’s coming into focus is that the “if we don’t do something now” line has lost its urgency and bailout fatigue is broad-brushing every initiative that comes along. People can’t keep track of all the programs, and they know that what they’re adding up to is tax Armageddon at some point sooner than later.
Still, ideas shared, and, hopefully, competent execution of one or more of them may begin to ping against the ediface of doubt and uncerainty about a free-falling house price environment. However, it should be noted that Paul Krugman sounds as if all he’s seeing from the new Administration is rearranging deck chairs on the Titanic. Buying 2 million homes, he’d probably say, is one of those deck chairs.
Bair and Bair Alike
This week CNBC caught up with Federal Deposit Insurance Corp. chairman Sheila Bair. Her to-do list these days locks her in the eye of the financial storm from every which direction–namely, bank stress tests, bank failures, and home foreclosures and the policy aimed at each.
CNBC has broken up its one-on-one interview into three separate segments.
Here’s the segment that focuses on the new Obama program aimed to mitigate home foreclosures.
For greater detail into Sheila Bair’s strategy to fix banks and slow foreclosures, see Big Builder senior editor Lynn Norusis’s “Bair on a Hot Tin Roof” analyisis.
Lobby Level: Business Week Takes on the Banks
Advertising everywhere is down. In many places, it’s out. Traditional print and broadcast media, whose lifeblood is generally advertisers, are taking it on the chin, not only because of inhospitable economic conditions, but also because of earth-shattering, structural secular change, i.e. people don’t consume media as they used to so traditional media is not as valuable as it used to be.
Now, there’s a third strike that media brands with cajones self-inflict. Their editorial goes after their advertisers with reportorial impunity, which doesn’t exactly earn the publication brownie points as the diminishing ad budgets get reallocated.
We wonder two things in light of the courageous piece Business Week has that drills in to the depths of how and why the foreclosures phenomenon has become the financial equivalent of post-Katrina New Orleans. One, is how many of the companies on the list below will come around to advertising in McGraw-Hill publications in the near [or maybe far] future?
We actually thought the lobbying world had cleaned itself up a bit a few years ago.
Equally eye-opening is the amount that financial firms lobbies funnel to the campaigns of targeted elected officials.
Still, this brings us to our next question. We wonder whether the intrepid Business Week reportorial staff will be turned loose to sleuthe out a story of similar import: the debt ratings agencies’ [including McGraw-Hill Companies' Standard & Poor's unit] role in the financial crisis.
Imagine the charts porn they could do to accompany that piece!
Freddie Mac’s Koskinen Speaks up
This interview is spin control. But it contains insight on where things stand now with the government sponsored entities.
Bloomberg’s Judy Woodruff interviews John Koskinen, ceo of Freddie Mac.