2011 May 19th

20% Down Required to Buy in Hoboken?

Here is a message from the National Association of Realtors:

FROM THE PRESIDENT
Take Action on 20% Down

As you may know, there is a proposal before regulators to require a minimum of 20 percent down on all residential transactions. If allowed to take effect, the rule would put home ownership out of reach for middle-income Americans. It would take the average family 14 years to save up the down payment to buy a home. We just don’t need more hurdles. So please take time to visit the REALTOR® Action Center to answer the Call for Action and tell Congress this does not work for our industry or our country.

Listen to the full President’s Podcast >

I am not so sure that requiring 20% down is a bad idea.  Is it bad for realtors and the real estate business?  Sure.  But there are way too many realtors out there today and anything that thins the ranks so that only the competent ones survive is a fantastic thing, in my opinion.  Is it bad for the economy?  How can anyone look at the credit crisis of ’08 and not realize that risky lending was a huge component of the cause.  Of course, the banks were at fault, and the rating agencies and mortgage lenders, too.   Yet this sense of entitlement to buy a home even when you can’t afford it does not sit well with me.  What do you all think?

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  1. Lorilol

    “It would take the average family 14 years to save up the down payment to buy a home.” How do you know THE PRESIDENT is lying? His lips are moving…
    If Congress inacted this rule the prices of RE would come down, not the salaries of middle-class.

  2. Craig

    Most middle class people cannot put down 20% on a home these days. Making that threshold mandatory is short-sided. It made sense decades ago when homes were priced at about the level of a person’s annual income or perhaps twice at most. My parents bought their first house in the 60s for $19k. Their second house in Westchester, NY cost $57k in 1976 – a bit more than what their combined annual income was. They had no problem saving the 20% down for those purchases. But salaries have not kept up with inflation. So now on average homes cost 3 times annual salary if you’re lucky. The dollar simply doesn’t go as far as it did when the 20% down threshold was first established.

    How many people have $100k in cash to put towards a $500k home today? Not many. The inability to put down 20% is not an indication that someone cannot afford a home. My fiancee and I didn’t have 20% to put down because saving huge wads of cash is not easy when mommy and daddy didn’t pay for your education and you live in a high cost of living area like this one. But we earn over $200k a year combined and have plenty of cash on hand for monthly carrying charges. Anyone wanna debate with me that we can’t afford our Hoboken condo?

    There’s a better indicator of competence to own a home than having a 20% down payment – that means nothing as it could have been gifted. Instead, scrutinize monthly income after all monthly overhead and remaining cash balances after the home purchase. Those are better indications of whether someone can afford a home. I agree that people should not be allowed to buy homes they can’t afford. But I’m going to have to strongly disagree that not having 20% to put down means they can’t afford it. That simply isn’t true and I’m a case in point.

  3. Lori Turoff

    So what should the cut-off be? 10%? 5? 3.5 like FHA loans? Or should there be a 10% + 10 HELOC option like previously? Should credit score matter? Why not no money down? Do you draw a line at all? Or do you rely on the lenders to use their credit standards to decide who gets to borrow & buy? I think absolutely requiring 20% may be a bit harsh but I do want to see homeowners have some skin in the game. Otherwise, what’s to stop them from just walking away when prices drop?

  4. laki

    Craig,

    Homes used to be affordable. Then the bubble formed, and as a consequence homes are not affordable anymore. So why not allow the bubble to deflate which would make homes affordable again? This would solve all the things you’re complaining about, without distorting the market.

    This argument is like government subsidized student loans. The cheaper the government makes the loans, the higher the tuitions go. And when this happens people like you say: make the loans even more affordable so kids can afford college. Off course this allows colleges to charge even more now…and so on. So all these subsidies, while well intentioned, make the problem worse.

    Translating this into the housing sector, If the government was to pull out completely from the mortgage market (no interest deduction, no FHA, no backstop to the banks, no fannie and freddie, no too big to fail, no mortgage insurance, etc). The real estate prices would collapse very quickly. And they would become affordable yet again and people like you would be able to put 20% down. Problem solved. And in this scenario, every lender would decide for themselves at what rate they want to lend at and how much money down they would require you to put down. And a natural equilibrium would form. Right now what we have is a system which is subsidized from every angle you look at. No wonder nobody can put 20% down.

  5. laki

    Also, another item to consider:

    How come we cheer when every other good that we want to own goes down in price (like computers, cars, clothing, gas, food, etc.) And yet when the most expensive good we want goes down in price (a house), the entire economy starts to collapse and people start freaking out?

    An asset most people want to own is in a bubble to a point where no one can afford it anymore – and yet the entire political system is doing everything they can to not allow pricing to correct. How come?

    I have thought about this long and hard for many years (i get paid to think about this stuff, so i do it every day all day long) and I concluded that this is a consequence of an unsustainable economic model which is very ponzi-like.

    Imagine a system where homes are so cheap that everyone can afford to put 20-30% down with ease. What’s so wrong with this picture, and why are we as a society so afraid of this state of the world?

  6. Tiger

    I am all for gradual phasing out of mortgage tax deduction, because towards the end of the day, it is the BANK, not the little guy, who is benefiting the most from this free money. Just look at Canada for an example.

  7. Rich

    Raising the down payment requirements to 20% under a democratic president would seem 100% against their principle. The democratic ideal seems to be that that everyone should own a home and they want to make it easier to do so.

    The 10% down plus 10% heloc option is what I used when I bought my first house in 2003. It was not super easy to save that money but it was obtainable with some hard work. And as the saying goes, I had some skin in the game. I had a vested interest in the property. I think something like this is a good compromise. Raising the down-payment up to 20% will crush the market hurting everyone that owns a property

    Getting rid of the mortgage interest and/or property tax deductions would screw people in high cost states like NJ. At least it helps level the playing field for people that live in high cost areas.

    As a perfect example – My brother lives in a 300K house in VA is easily bigger then the million dollar home that recently sold on my street in Weehawken. His house is on also 10 acres not a 50×100 lot like my neighbors.. Also, his property taxes are less then $2K

    Mortage interest on a 800K loan is $40K per year @ 5%
    Mortage interest on a 300K load is $11K per year @ 5%

    Taxes in NJ on that house are 15K
    Taxes in VA on that house are $2K

    Using this example a similar house costs $42K more per year to run in NJ… If my math is right you need to earn a extra $68K pretax to live in NJ.

    Getting rid of those deductions will cause people to vacate high costs states driving down prices

  8. laki

    “Getting rid of those deductions will cause people to vacate high costs states driving down prices”

    And, in a grand scheme of things, how is this a bad thing? It sounds exactly like rational allocation of resources. Sure, there will be some short term pain for certain people who will lose some wealth, but on a long run this is exactly what you want to happen if you want a stable and prosperous society/economy.

  9. JJ

    Lori- I had the same reaction when I saw the NAR email today!

  10. Craig

    “So what should the cut-off be? 10%? 5? 3.5 like FHA loans?” – Lori

    Even I think that 3.5% or 0% down is not a great idea. I think 10% is a reasonable cut-off. At today’s housing prices, that’s plenty of skin in the game. 5% down should be the absolute minimum, but the more you put down, the lower your interest rate. Even better, I’d apply tax-deductible private mortgage insurance to every mortgage no matter how much is put down until a certain percentage of paid equity is attained (the paid equity goal being lower the more you put down). That would protect lenders from all defaults and give them incentive to lighten up on lending standards. It could also get the gov’t out of the mortgage insurance business – eliminating the need for FHA.

  11. Tiger

    Craig, insurance is so overrated. The majority of questionable subprime mortgages had zero to little equity, and most, if not all, were PMI insured. What did insurance do? Just like banks, they couldn’t keep up with their promise, and you and I have to pick the tab (and probably our kids will too).

  12. Lori Turoff

    That was my immediate thought as well – so who is going to bail out the insurance companies? Should we leave the stability of the housing market resting on AIG’s shoulders?

    Craig, your justification for not requiring equity still doesn’t deal with the problem of home owners simply walking away from their property when they are underwater. I don’t buy the NJ/VA comparison. My sister lives in Old Town, Alexandria. It’s the part of Virginia most like Hoboken – urban, historic, extremely close to DC, mostly row houses & condos. Her row house is similar to any brownstone in Hoboken. The market value is over a million, her taxes are over 10k and she sends her kids to Catholic school because the public schools aren’t great. You have to compare apples to apples. I’m sure there are suburbs in VA that are less expensive but so are parts of suburban NJ – parts of Sussex county, for example.

  13. Craig

    Presumedly, the insurance companies won’t need bailing out if they are run properly with gov’t oversight. AIG didn’t fail because it was paying out too many insurance claims, it failed because of its risky investing in search of more profit. FHA has never needed bailing out in its history despite the losses it’s taken. It has always been self-financed soley with its premiums and never taken a dime of taxpayer money. It should be the model for the private mortgage insurance industry.

    I never said there should be no equity reguired. What I said was 10% is a fair requirement. On a $500k house, $50k is a lot of skin in the game for the majority of people. Your viewpoint appears to be based on the presumption that only those who put 20% or more down on their homes won’t walk away from their property if it’s underwater. Surely, you know that’s not the case. The fact is regardless of how much skin a homeowner has in the game, if they can no longer afford their house and can’t sell it for enough to pay the debt, they’re going to walk away. There’s no way to prevent that possibility, so all you can do is insure it.

  14. laki

    Craig,

    Would you lend $450,000 of your own hard cash, for 30 years, to someone you don’t know who is buying a house that appraised for $500,000?. The interest rate they’ll be paying you is in the 5% neighborhood. They can walk away from the loan whenever they want, and you can keep the house in that case… (but keep in mind if they stop paying – It’ll probably take you 2 years and all kinds of legal fees to kick them out and in that time they’ll probably stop taking care of the property, or might even damage it along the way). Also, you give the person you lend money an option to pay back the loan whenever they want, but at the same time you don’t have the option to ask for your money back outside of the original 30 year schedule.

    Would you ever lend your own money like that? This is a Yes or No question.

  15. FN

    AIG went bankcrupt because they were insuring mortgage securities.

    Fannie Mae and fredie Mac were never bailed out in thier history like FHA.
    On whether FHA is a governement subsidy read teh CBO analysis 1.5% of loan value is the taxpayer subsidy to FHA as per cbo.

    http://www.cbo.gov/ftpdocs/120xx/doc12054/05-18-FHA_Letter.pdf

    I think the discussion needs to be inverted. Before the craziness (a person shold not get a loan they cannot afford) there were 4 main reasons for default ; loss of job, health, death or divorce

    So the downpayment is really a way for the lender to be able to get their loan back after cost in case of adverse shock to the homeowner. The cost of foreclosure is atleast 20% in NJ if not more. So yes anyone who cannot pay down 20% cannot afford a home as he or she cannot discharge their obligation on the loan in case of a shock.

    Having said that there is a case of goverment help for first time buyers (only once in lifetime). So I would say

    1. Reinstate the first time home buyer credit and do away with mortgage interest deduction.
    2. Only for first time home buyers a 10% of the house loan by IRS which is bankcruptcy remote so one has to pay it

  16. laki

    FN,

    Thanks for digging out the FHA CBO piece. Everyone who is familiar with the financial markets and how mortgages in particular work knows that FHA is a subsidy. This is just a fact that cannot be debated. It is not a matter of opinion. Just like a blue chair is blue. There is no debating that. Among the people who know all the facts, whatever their ideological stance on FHA is, you will not find a single person who things that FHA is not a subsidy.

    People who claim otherwise, either don’t know the facts or they struggle with basic algebra (and knowing the facts means actually having crunched all the numbers yourself, NOT having read some newspaper article written by a guy who hasn’t crunched the numbers either).

    I’ve even posted some elaborate analysis on this blog explaining how one cannot equate subsidy to “receiving taxpayer dollars”. I believe i presented specific examples of how financial companies can be subsidized without actually receiving taxpayer dollars and how this subsidy can make them extremely profitable, and I’m pretty sure Craig was involved in that discussion. And yet, he still keeps using this flawed argument of equating the two to conclude that FHA should be a model for private insurers. This is flawed on so many different levels.

    The fact is if there ever was a private company insuring the exact same mortgages as FHA did, that company would’ve gone under in 2006/2007 with the likes of New Century and American Home Mortgages.

    But to broaden this argument further, mortgage insurance companies in fact do not add any value to the current system. If people who lent money for mortgages were individuals and they lent it to other individuals directly then the concept would make perfect sense. The purpose of an insurance company in that case would be to take away idiosyncratic risks associated with individual mortgages (for a fee) so that individual lenders don’t have to bare the risk that something unusual happens to their single borrower. But this is not how mortgage finance market works. The mortgage loans are already pooled in huge buckets, so even if you buy a single bond, you have already diversified all the idiosyncratic risk. By owning one bond, you’re exposed to 100s or 1000s of individual mortgages. Same goes for banks, they hold 10s or 100s of thousands of individual mortgages, so they too don’t take any idiosyncratic risk.

    So the idea that somehow risk in the system is eliminated when a bank transfers default risk from its book to an insurer’s book is nonsense. The risk is still there, it is just that someone else bares that risk.

    So if the lending standards are weak, the unnecessary risk is introduced to the system regardless of whether individuals, banks, insurance companies, or the taxpayers bare that risk. The good barometer for whether the standards are too lax or not would be to ask yourself a question – would I want to be on the other side of this deal if nobody was backstopping me? If there were no banks, would i want to lend my own hard cash to someone under these terms. If the answer is no – that tells you everything you need to know.

  17. Lori

    I love your posts, Laki. Thank you so much for your contribution!

  18. laki

    Thanks Lori… I like your site and your posts too :)

  19. Craig

    The 1.5% subsidy rate CBO came up with is a projection for 2012 based on the difference between the present value of the loan guarantees FHA provides(estimated at 6% of initial loan amount) and the present value of FHA’s receipts from premiums (estimated at 4.5% of initial loan amount). Estimating those values required coming up with discount rates compared to what private sector loan guarantors would charge for the same loans. All of these calculations were estimated and theoretical. They have no basis in actual real-time numbers, and the CBO letter acknowledges this on page 14.

    Now, if you want to calculate and compare fair market value of what FHA charges for loan guarantees with what the private sector charges less actual premiums collected, then technically speaking that discount and any shortfall that results can be considered a subsidy I suppose. But it’s still not a subsidy that’s paid for with taxpayer appropriated funds from Congress. That theoretical 1.5% shortfall would require every FHA borrower to default at the same time before taxpayers would be at risk to pay it – an unlikely scenario. FHA could always just raise the premiums they collect again to cover it. So what’s the problem?

  20. laki

    This is the last time I’m going to post on FHA gecause I’m realizing its pointless to argue with someone who actually doesn’t see the big picture. But for the record:

    FHA loans originated in 2006 and 2007 were the worst sub-prime type loans. Poor people who put no money down at the peak of the market buying houses they couldn’t afford. The losses on these vintages are truly staggering as majority of these people ended up defaulting (and for each default the ultimate losses were 70-90% of the original mortgage amount). So had FHA been a private company in 2007 or so, when these defaults started going parabolic, all the banks would’ve stopped doing business with them because the losses were overwhelming all the reserves they had and all the fees they were collecting back then. Remember, an insurance company whose survival is in question cannot underwrite any new business. Why would anyone pay money upfront to get “insured” with a counterparty whose survival is in question? If the counterparty files for bankruptcy they don’t have to honor the insurance policy anymore.

    This is just rational behavior. Would you ever take out a life insurance policy with an insurance company that is about to go under? No way.

    So had FHA been a private company, they would’ve stopped underwriting new insurance policies in 2007. Soon after that, the losses on their insurance book would’ve overwhelmed all their reserves and they would’ve filed for bankruptcy.

    But this didn’t happen. Why? Because all the banks knew FHA is backed by the full faith and credit of US government. So, at that time not only did FHA continue underwriting mortgages, but they ramped it up big time ( look at the chart: http://www.doctorhousingbubble.com/wp-content/uploads/2011/02/fha-share-of-market.jpg ) And on top of it they also upped the fees on these new policies. So they started collecting larger fees on a much bigger pool of mortgages and these fees now were large enough to cover for the losses on the 2006/2007 book. And, when the new policies they insured in 2008 started going sour and these people started defaulting too, they again increased the insurance activity and now these new fees were large enough to cover for the 2008 defaults as well… And so on. They kept doubling down over and over again.

    This is in essence a ponzi scheme. The only way to pay off the original insurance policy is to double your business and pay the old obligations with a much bigger book of new fees. If your creditworthiness is guaranteed by the government you can keep doing this forever. And you can borrow money at 0% as well.

    So, anyone who says that FHA should be a model for private insurers is confused and/or misinformed at best. Private companies do not have a luxury to operate like FHA does. The market would not allow it.

  21. Craig

    “FHA loans originated in 2006 and 2007 were the worst sub-prime type loans. Poor people who put no money down at the peak of the market buying houses they couldn’t afford. The losses on these vintages are truly staggering as majority of these people ended up defaulting (and for each default the ultimate losses were 70-90% of the original mortgage amount).” – Laki

    You state this as being “for the record”, yet cite no verifiable source backing up the statement. Your argument would be much more convincing if you would do so. Please cite the source stating 2006/2007 FHA loans were to poor people, most of whom defaulted.

  22. UPennAlaskan

    Laki, I’m convinced capitalism by definition is a ponzi. The only way it works for the long term is an ever growing population.

    Student loans rates should be ~20% or roughly the same rate as credit cards. There is no collateral to backstop these products like real estate or car loans. The singular fact that it is almost impossible for an average, non-disabled person to discharge federal or private student loans through bankruptcy…keeps the rates artificially low.

    Mortgage rates should be a function of DP. The more you put down the smaller rate. 8%-12% seems fair assuming a no-subsidy world.

    Craig, the reason very few people can afford a 20% DP is….Americans have become poor over the past couple decades. Real wages are stagnant while asset prices have risen. And the dollar is weak, very weak. NYC real estate prices are cheap compared to other major international cities all due to weak currency. A 20% requirement is harsh. However that rough treatment insures a stable system.

  23. laki

    Craig,

    The links I’m about to provide are not where i get my data. I trade mortgage bonds, so I actually pay to be able to look at the raw data which i crunch myself… but either way here are some links for you which i was able to find on the internet:

    http://www.creditscoring.com/average/FHAtrend.html

    This site provides links to official government documents. In 2006/2007 “more than half of the FHA borrowers had FICO scores less than 620!” … by FHA’s own definition everyone with a score less than 660 is subprime.

    And not only did they have sub-prime-like FICO scores, but they exhibited the same pattern of behavior. The following chart was derived from HUD/FHA data as of 08/31/2009 and was presented by T2 partners LLC (a well regarded hedge fund) at a conference which occurred in early 2010.

    http://blogs.reuters.com/felix-salmon/files/2009/10/fha-delinq-mother-of-all-head-fakes.pdf

    By mid 2009 32.4% of all FHA insured home buyers who bought in 2007 have stopped making their mortgage payments! 2 Years after having bought a house every third guy stopped paying! And since 2009, the numbers have gotten even worse. In the order of magnitude, we saw identical trends in 2006/2007 FHA as we did for 2006/2007 subprime that wasn’t insured by FHA.

    Now, Observe the first chart on the following page:

    http://seekingalpha.com/article/195487-double-dip-in-housing-will-drag-down-economy

    This shows that by 2009 subprime was at the same 30%+ delinquency levels as was 2007 vintage FHA as shown on the T2 presentation. To an uneducated eye (or one that hasn’t read my previous posts) this chart alone would imply that FHA is somehow better than subprime (after-all FHA delinquency shown here is only 9.4%). But this has to do with the ponzi element I was talking about earlier. After 2007 issuance of subprime loans stopped. So subprime delinquencies of 30%+ on this chart represent the borrowers from 2007 and prior, whereas FHA ramped up insurance activity big time (look at the numbers on the X axis in the T2 presentation). So if you took a snapshot at any point in time and measured total FHA delinquency, the percentage you would get would be skewed by brand new loans that haven’t had chance to default yet! And hence the low total delinquency. To make an extreme analogy (just so it is clear what I’m talking about): If entity XYZ insured 100 loans in 2007, all of which went bust (100% – every single one), and then on the first day of 2008 they insured 900 new loans, on the second day of 2008 they would be able to claim a delinquency rate of 10%. While this number is technically correct, it wouldn’t capture what is really going on.

    And there you have it. Please don’t tell me you need any more proof.

  24. laki

    UPennAlaskan,

    Yes, financial markets have ponzi elements to them. If rational expectation of future population growth was the only structural contributor to this ponzi element – that wouldn’t be a problem. In fact, that system could be fairly stable.

    However, if the ponzi structure is so large that it needs the base of the pyramid to grow much faster than the population growth in order for the pyramid structure not to collapse – well then you have a big problem.

    Check out the chart of the TOTAL debt to GDP in the US over the past 90 or so years:

    http://paul.kedrosky.com/WindowsLiveWriter/U.S.TotalCreditMarketDebtbySector1929200_93C7/debt-trend-breakdown_2.jpg

    Notice how the system needs an ever increasing amount of new debt just to be able to repay the old maturing debts and keep the economy going… Also, keep in mind that this is normalized by GDP which already captures the population and productivity growth (Debt divided by GDP).

    Ouch.

  25. Tiger

    Thanks Laki! Eye opening indeed.

    To me it’s common sense. The more skin you have in the game the less likely you will walk away. AND IT APPLIES TO EVERYTHING!! Homes, cars, jobs, heck, even relationships!

  26. Craig

    Laki – I won’t deny that FHA has insured some risky people, but they did so far less often than the subprime market – but unlike those preditory lenders, FHA always verfied income. Thank you for providing links to back up your theories. They underscore a common theme: private sector professionals mistakenly thinking they understand public sector operations. Since you won’t take my word for it, listen to what Davis Stevens, the Commissioner of FHA had to say about it’s financial health:

    – FHA’s reserves cover the next 30 years of projected losses in its financing account.

    – These reserves assume the FHA takes in no new business but continues to pay claims (this directly contradicts Laki’s claim of a “ponzi Scheme” and underscores his limited knowledge of how FHA operates).

    – Its much-publicised capital reserve ratio refers to an additional account that holds excess funds above this 30 year financing account. The uninformed think that because this reserve has dwindled below the Congress-mandated 2% level, FHA is in financial distress. That is not the case.

    – With these reserve accounts taken together, FHA continues to hold more than $30 billion in reserve funds, or more than 4% of its insurance in force.

    – While FHA delinquencies are up, it is misleading to compare FHA to the subprime market because FHA’s serious delinquencies remain one-third of those in the private subprime market.

    – FHA has little exposure in hardest hit states like Arizona, California, Florida and Nevada. During the housing boom, FHA did little business in these markets because it wouldn’t insure the dangerous loans made by subprime companies.

    – As of 2009, the average FICO score of FHA borrowers is 693, compared to 633 in 2007.

    http://online.wsj.com/article/SB10001424052748704471504574447961541561366.html#printMode

    The difference between an FHA guarantee and private mortgage insurance is that the FHA pays out on valid insurance claims, whereas PMI does not. Repeat after me: PMI is not insurance! The major PMI underwriters have no capital reserves that they build with the premiums they collect. They do not even buy reinsurance to cover tail event loss. Most PMI underwriters are insolvent, so they spend their time exercising right of rescission. This is the basis of my statement that FHA should be a model for the PMI industry – unlike them, it can pay its claims. And it has never taken a dime of taxpayer money in doing so, which will continue (at least for the next 30 years).

  27. laki

    Craig,

    I know i said it before, but this truly is my last post on this topic.

    I’ve looked at more or less every single pool of mortgages that exists out there, FHA, Fannie, Freddie, Private Label, you name it. I’ve been dissecting these numbers for years. Davis Stevens might as well be putting a spin how gravity in fact doesn’t exist. He’s a politician making claims for the sake of whatever agenda he has. But believe what you want. I really don’t care. All i wrote on this blog were facts and whenever i projected my opinions on something I stated “in my opinion”. But when it comes to FHA, there were really no opinions in my posts. Just facts.

    And you didn’t carefully read what I posted either. If you did, you would realize that around 80% of your bullet points in fact do not contradicting *any* of my claims. FHA ramped up the insurance recently, so off course their overall delinquencies are lower when compared to pools that solely consisted of 2006/2007 borrowers who bought at the peak and hence had the most negative equity. I even figured someone would bring this point up, so i tried to preempt it by explaining the situation in detail in my previous post. But DESPITE THIS, you’re using a bullet point which relies on this flawed argument. And again you’re saying how they haven’t taken a dime of taxpayer money, which too doesn’t do anything to support your argument. Also, FICO scores in 2009 have nothing to do with their activity in 2006/2007. If they weren’t part of the government they wouldn’t live to see 2009. They would go under with the rest of them. Instead, they were able to grab market share in 2008 and double down and then further expand in 2009 with now better borrowers (cause there was nobody left to compete with and they tightened their standards at that point).

    The other 20% of your points from the commissioner are pure BS that are either straight up false or rely on a very optimistic view of the future.

    Just like Lehman CFO said they’re in a stellar financial shape just a day after they went bust (and later it turned out all their assets were worth 8 cents on the dollar in the CDS auction). Just like Greece, Portugal and Ireland have continuously stated that they don’t need bailouts (only days before accepting enormous sums of money from EU/IMF). Just like Fannie and Freddie were in “excellent shape” according to just about any commissioner/ insider/ congressman only months before going belly up and having to accept 100s of billions of dollars of government dollars, backstops and guarantees.

    I have a final advice for you. Forget what I’m saying. Forget what the commissioner is saying. Try to get your hands on the loan level data and spend a month studying it and analyzing it and then form your opinion. If you don’t do that, well then you’re like a blind man who’s arguing about the colors of objects he’s unable to see. If you don’t feel like spending all that time, then at least quit arguing about something that you haven’t really looked into.

    I’m done and done with this topic.

  28. Lori

    I find it curious that all the data related to FHA refers to “single family homes”. Why do they leave out condos? Is there other data out there that applies to condos? Or is it that there are so few FHA approved condo units?

  29. Craig

    Laki – My point was to illustrate the differences between FHA and the private subprime market, as well as to illustrate why the PMI business could learn a thing or two from FHA. Interpret my points and the words of the FHA Commissioner as you wish. If FHA needs a bailout in the next few years, feel free to come back and say “I told you so”. Other than that, we’ll have to agree to disagree.

    Lori – that’s a good question . My understanding is that the vast majority of FHA loans are for single family houses. The number of FHA loans for condos may be so relatively small that they are statistically irrelevant and thus no information is kept for them. Either that, or condo data is just lumped in with the rest.

    The one last point I’ll make about this topic is that there is legislation pending that if passed would require a 5% minimum downpayment for FHA loans. I for one think that’s a good idea. If you can’t put down at least 5% on a home, it’s probably not a good idea to be buying one.

  30. homeboken

    Craig – the FHA minimum downpayment is now 3.5% correct? I agree that raising the minimum is good protection, but on a $500,000 we are still only talking about $25,000 in total downpayment @ 5.0%. I don’t think that is sufficient “skin in the game.”

    There is another way to look at this. The common theme here seems to be that 20% is too much of a DP. I’ve read comments that say the average 2 income family has trouble saving $100,000 to purchase their home. I agree with this.

    But thus far we have only discussed one part of the equation, the downpayment %.

    There are two sides that both need tweaking in my view.

    DP % * Purchase Price = DP

    We can play with the DP % all we want, but another way to look at it is that Purchase Prices are still too high. If the $500,000 home is priced at $400,000, then the house becomes more affordable in terms of DP $.

    Of course, adjusting the Purchase Price side of the equation is total taboo to the current administration and the banks. Hence, everything that can be done to prop up the purchase price side (FTHB tax credit, historic low interest rates, etc) is being utilized.

    bottom line, the market can not clear and correct until these subisdy (lack of a better word) measures are removed.

  31. HighDPLowPrice

    I am blown away Craig does not realize the link between low down payments and high prices. What is one of the reasons prices higher now relatively. The downpayments are lower. Therefore a 20% DP will not be a burden.

    Also if it takes 14 years to save up 20% then it would take 70 years to pay off the house. Whi knew home buyers were buying a lifetime burden.

    Lastly almost every chart of FHA defaults shows that the FHA will soon be out of money (They have been losing money drawing on reserves for several years). When the gov’t/taxpayers give money to the FHA will it be a subsidy? It was 100% predictable their prices and underwriting would yield this outcome. Harder to believe you insisted there had to be a loss first before you admitted it was a subsidy.

  32. HighDPLowPrice

    Delinquency information
    Q207 Q111 Change Seriously DQ
    FHA 3,030,214 6,285,254 3,255,040 511,620

    The FHA seems to be doing well

  33. Tiger

    > adjusting the Purchase Price side of the equation is total taboo to the current administration and the banks

    So the Bush administration pushed for affordable home prices? If the Bush administration knew how to do math, we wouldn’t be in this mess… oh wait, it is Clinton’s fault isn’t it?

  34. homeboken

    Tiger – please don’t mistake my comment as political, it was not intended that way.

    The current economic climate is the result of decades of loose fiscal policy and continual bubble inflating in various sectors. I do not mean to turn this into a D vs R debate at all.

  35. laki

    Lori,

    On your question about condos. It turns out single family homes dominate the market so they’re most frequently used in all the national stats. Here are some numbers for you that break down the housing stock in US. All the numbers are in millions and are estimates (but very good estimates; margin of error is no more than +/- few percent for each of these numbers).

    Total Housing Units… 131
    Broken down by occupancy:
    Owner Occupied… 74.5
    Renter Occupied… 37.5
    Unoccupied… 19 (BTW, this number is highest since WW2)

    Borken down by type:
    Houses (What they call 1-4 Single Family)… 100
    Condos and Coops… 9
    Apartment Rentals (What they call Multi Family)… 22

    Further breakdown of owner occupied units:
    Houses with a Mortgage… 47
    Condo or Coops with a Mortgage… 3
    No Mortgage… 24.5

  36. Tiger

    Thanks homeboken for clarification, and I fully agree, it is a result of decades of loose fiscal policy, probably dating back to the 70s. For the record I am neither D or R, I consider myself a hybrid, lol.

  37. Craig

    “Lastly almost every chart of FHA defaults shows that the FHA will soon be out of money (They have been losing money drawing on reserves for several years). When the gov’t/taxpayers give money to the FHA will it be a subsidy?” – HighDPLowPrice

    Those charts are wrong according to the FHA Commissioner. I have already posted a link where he states they are solvent for at least the next 30 years with current projected losses even if they took in no new business. If you are calling him a liar, that’s between you and him. It would indeed be a taxpayer funded subsidy if FHA needs a bailout. If that happens, you can come back and say “I told you so” and I’ll admit I was wrong. Until then your viewpoint is nothing but speculation.

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