In a recent post, I noted that FHA mortgage delinquencies skyrocketed more than 25%. Since most FHA borrowers only put 3.5% down, when factoring in a 6% commission, 2% closing costs, and a declining market, nearly all FHA borrowers over the last five years are effectively underwater. When these borrowers sell or quit paying, the losses will be huge because the capital recovery will be far less than the original loan balance. With a 9.4% serious delinquency rate, the FHA is facing 713,104 future foreclosures. This rate has been rising steadily, and many more delinquencies are coming because many borrowers will want to move before prices regain peak values. Many borrowers may opt for a strategic short sale or strategic default, after all, they don’t have much skin in the game, so it’s easy for them to walk away.
The FHA insurance fund has far less in reserve than its federal mandate, and many observers are concerned a bailout of the FHA is inevitable.
To avoid a federal bailout, the fund must be replenished quickly with user fees. To this end, the FHA recently raised the fee it charges at origination and the fee for ongoing insurance. Even these measures may not be enough. To raise more money, the FHA must abandon its mandate to provide loans to low and moderate income borrowers and tap into the market for high wage earners. After the fund stabilizes, the conforming limit for FHA loans can be lowered again and the FHA can return to exclusively making loans for low to moderate income borrowers.
In 2008, the conforming limit for both GSE and FHA loans was raised from $417,000 to $729,750 as non-insured private financing evaporated. In late 2011, the conforming loan limit for high income areas like Orange County or the San Francisco Bay area was lowered on GSE loans from $729,750 to $625,000. What perplexed many at the time was that the conforming limit for FHA loans was not similarly reduced. Why did the government do this? They too recognized the need to get high wage earners into the fund.
Ever since the change, many of Shevy’s clients faced the cost of financing dilemma this change creates. If the borrower uses a $625,000 GSE-backed loan, even with less than 20% down and private mortgage insurance, the cost of ownership is significantly less (PMI is half of the FHA insurance fee). The cost of the incremental dollars when the borrower goes from $625,000 to $729,750 with less than 20% down is significant (nearly $500 per month) because the FHA insurance is much higher. The borrower pays the extra money into the FHA insurance fund. Anywhere high wage earners are using FHA loans — and many are — the FHA is getting a considerable revenue boost.
Why not do more? If we really wanted to get more high wage earners to pay FHA insurance, why not lower the GSE conforming limit further?
Think about what would happen if the GSE conforming limit were reduced back to $417,000 and the FHA limit were maintained at $729,750. Anyone putting less than 20% down on a house between $450,000 and $750,000 — which is a huge portion of the coastal markets in California and New England — would be pushed into FHA loans. If these markets really have bottomed — and that’s a big “if” — these new high wage earning borrowers would not cause large losses, and the increase in FHA insurance payments would be dramatic.
Further, if the conforming loan limit on GSE loans were reduced, it would also help reduce the size of their operations and make it easier to someday dismantle them. As long as the GSEs are insuring more than half the housing market, there is no way we can reform or eliminate them.
Lowering the GSE conforming loan limit will significantly increase FHA insurance fund revenues while simultaneously reducing the footprint of the GSEs. Don’t be surprised if you see this happen sometime soon. If politicians don’t do something like this, they will have to bail the FHA out, and none of them want to face that problem.
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Proprietary Irvine Housing News home purchase analysis
66 WEEPINGWOOD #93 Irvine, CA 92614
$485,000 …….. Asking Price
$429,000 ………. Purchase Price
10/29/2003 ………. Purchase Date
$56,000 ………. Gross Gain (Loss)
($34,320) ………… Commissions and Costs at 8%
============================================
$21,680 ………. Net Gain (Loss)
============================================
13.1% ………. Gross Percent Change
5.1% ………. Net Percent Change
1.4% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$485,000 …….. Asking Price
$16,975 ………… 3.5% Down FHA Financing
3.55% …………. Mortgage Interest Rate
30 ……………… Number of Years
$468,025 …….. Mortgage
$134,548 ………. Income Requirement
$2,115 ………… Monthly Mortgage Payment
$420 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$121 ………… Homeowners Insurance at 0.3%
$488 ………… Private Mortgage Insurance
$332 ………… Homeowners Association Fees
============================================
$3,476 ………. Monthly Cash Outlays
($316) ………. Tax Savings
($730) ………. Equity Hidden in Payment
$19 ………….. Lost Income to Down Payment
$81 ………….. Maintenance and Replacement Reserves
============================================
$2,530 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,350 ………… Furnishing and Move In at 1% + $1,500
$6,350 ………… Closing Costs at 1% + $1,500
$4,680 ………… Interest Points
$16,975 ………… Down Payment
============================================
$34,355 ………. Total Cash Costs
$38,700 ………. Emergency Cash Reserves
============================================
$73,055 ………. Total Savings Needed
The property above is available for sale on the MLS.
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Cost of Ownership Analysis
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Gain a competitive advantage over other buyers. By locating distressed properties -- before they hit the MLS -- you can discover where tomorrow's REOs and short sales will appear. Most of these properties are not listed on the MLS, but they will be soon. Research properties in advance and get a jump on your competition. Don't miss out on another deal because you couldn't act quickly. Use this tool to your advantage! The red properties are already bank owned. As soon as REO asset managers prepare them for sale, they will be on the MLS. Get ready! The green and blue properties have owners who are not paying their mortgages. They may be offered as short sales, or they may go through foreclosure and become REO. Either way, they will also likely be available on the MLS soon. Find your next home! Be prepared to offer on these properties by researching them in advance or risk losing out to buyers who are have done their homework. Start your research today! To find distressed properties, enter your desired location and press search. Scroll through list by pressing "next."Comparative Market Analysis
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$469,000 28 ROCKWOOD |
0.4 miles 3 bd / 2.5 ba 1,520 Sq. Ft. |
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0.4 miles 3 bd / 2.5 ba 1,578 Sq. Ft. |
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$669,000 31 WATERWAY #3 |
0.41 miles 2 bd / 1.75 ba 1,930 Sq. Ft. |
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$738,000 14 SOUTHWIND #53 |
0.41 miles 2 bd / 2 ba 1,930 Sq. Ft. |
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0.79 miles 2 bd / 2 ba 1,540 Sq. Ft. |
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$529,988 164 AGOSTINO |
1.09 miles 3 bd / 2.5 ba 1,610 Sq. Ft. |
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$470,500 17 RANA #48 |
1.13 miles 2 bd / 2.5 ba 1,550 Sq. Ft. |
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$569,900 27 MADRONA |
1.24 miles 3 bd / 2.25 ba 1,868 Sq. Ft. |
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$529,000 4 GARZONI AISLE |
1.33 miles 4 bd / 2.5 ba 2,000 Sq. Ft. |
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$520,000 4 TORRIGIANI AISLE |
1.33 miles 4 bd / 2.5 ba 2,000 Sq. Ft. |
Prices fell in 60% of the country in first quarter of 2012
Shrinking inventory and shifts in sales composition have provided a foothold for housing prices to start climbing, according to Fiserv, Inc.
The company released its Case-Shiller Home Price Insights Monday, showing that after six years of decline, home prices are finally starting to stabilize.
Prices increased in 40 percent of the surveyed 384 metro areas in the first quarter of 2012, and the report showed that it’s actually cheaper to buy than rent in many U.S. markets.
Single-family home prices increased in 151 out of 384 metro areas in the first quarter of the year compared to the same time in 2011. While average U.S. home prices fell by 1.9 percent on a year-over-year basis and are expected to fall another 1 percent in the next year, Fiserv Case-Shiller forecasts a 5 percent increase between the first quarters of 2013 and 2014.
Fiserv chief economist David Stiff attributed the price increases to a rapidly-falling inventory.
“Inventories of single-family homes have dropped below 2.5 million units, the lowest levels since 2004. This shrinking supply of unsold homes is nudging home prices upward in selected markets,” said Stiff. “However, negative equity remains a factor constraining supply in some markets, since many underwater homeowners cannot come up with the cash to cover the difference between their outstanding mortgage balances and the current market value of their homes. Many positive equity homeowners are also keeping their houses off of the market, waiting for price increases to boost their selling profits.”
In addition, the changing composition of unsold inventories and homes sold appears to be providing a boost to prices in some areas. In many crash markets, the share of foreclosed sales is shrinking as banks promote short sales and investors grab up repossessed homes. As a result, heavily-discounted sales are making up a smaller percentage of overall sales, resulting in an upward swing in prices even in relatively flat markets.
Many of the hardest-hit markets posted price gains, including Detroit (8.6 percent up) and Miami (6.4 percent up). However, prices continued to drop in areas still flooded with foreclosed properties, including Atlanta (down 17.4 percent), Las Vegas (down 7.4 percent), and Memphis (down 4.7 percent).
Rent prices have also increased, driven primarily by increased apartment demand. The mortgage payment for a median-priced home is now less than the median asking rent, making buying a more attractive choice in many parts of the nation. This follows a separate report from Zillow that also suggested buying is the less costly option.
As housing markets stabilize, the demand from first-time buyers is expected to pick up. In any event, the increased affordability of buying will likely push home prices upward as demand rises.
Fiserv advised investors to look west for price appreciation, as eight of the top 10 markets projected to grow at the fastest rate in the next year are in western states, including Oregon, Idaho, California, and Washington.
Of course, much of this forecasted growth may be thrown off track if economic conditions deteriorate.
“The state of the overall economy presents the biggest risk to the housing market,” said Stiff. “The economic recovery has stalled each spring/summer during the last three years, and last summer’s economic stumble was accompanied by a sharp decline in consumer confidence, which cut into home sales activity and pushed home prices down a little further. If confidence were to drop by similar amount this year, either because of the monetary crisis in Europe or the political impasse in Washington D.C., then we could experience another downward leg in home prices.”
“However, given that owner-occupied housing is incredibly cheap historically and falling confidence would be accompanied by lower mortgage interest rates, we may be at a point where housing markets can finally withstand a weak economy.”