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The Coming FHA Debacle & Another Kick in the Groin to Multifamily Valuations
October 9, 2009 by Neil · 2 Comments
Fears are mounting that the Federal Housing Administration will need a taxpayer bailout in the next couple years.
The Federal Housing Administration, generally known as “FHA”, provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934. According to the HUD website: “FHA is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing. The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program entirely.”
HUD may well need to change the wording on its website soon.
Mortgage industry expert Edward Pinto estimated that the agency faces losses of $70 billion on loans it has already made, leaving it short of its current reserves by around $40 billion. That estimate is modeled under the assumption that FHA-backed loans will perform similarly to loans made by Fannie Mae in 2006 to borrowers with low down payments. The default rate on FHA-backed loans reached 8.1% in August, and a back-of-the-envelope calculation by housing economist Thomas Lawler estimates that the FHA is carrying around $66 billion in loans that are in default.
Why is FHA hemorrhaging money like this?
Most of the FHA-backed loans to homebuyers have exceptionally high loan to value ratios. What little money buyers would need for a downpayment is coming from the $8,000 tax credit. As Dr. Housing Bubble notes: “For a[n] FHA loan, you would only need roughly 5 percent for a downpayment, or $10,000. Use the tax credit and you are buying a home for one month of rent!”
According to Pinto:
As of August 31, 2009, 5.73% of the 2.76 million FHA-endorsed loans had at least one default.
After 12 months, FHA and VA loans are suffering the highest re-default rate, at 59.1%
The bad accounting practices behind Alt-A and Option ARMs that drove Washington Mutual and other banks to extinction are now taxing Uncle Sam’s back further.
Until yesterday, I thought the tax rebate was a harmless gimmick. Unless the FHA program is radically reconfigured to prevent people from buying homes with virtually zero down, my bearish concerns about the housing market until now seem bullish by comparison.
Seven million shadow housing inventory units coming into the pipeline, half of all residential homes underwater by next year…The data already shows higher apartment vacancies throughout most of the country. This news only underscores the upward trend for further apartment vacancies, and plummeting capitalization rates.
You can read Pinto’s entire report here:
Mega hat tips: Dr. Housing Bubble
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2 Responses to “The Coming FHA Debacle & Another Kick in the Groin to Multifamily Valuations”Trackbacks
Check out what others are saying about this post...[...] profit would be completely undercut if he continues with the home buyer $8,000 tax credit — if it is not coupled with a verifiable requirement that homebuyers put down 20% of the purchase pric…. The Chinese residential real estate market is stabilizing in no small part because of this rule as [...]
[...] Housing prices have been taking a severe beating. To add injury to injury, shadow housing inventory of seven million homes still hasn’t been processed by, or excreted out of, the system. Once prime candidates for homes are strategically defaulting on their mortgage obligations. New homebuyers using the FHA program are defaulting at a rate of nearly 6%, and redefaulting after loan modifications at 59%! [...]