When The First Time Home Buyer Tax Credit Ends, What Happens Then?

Simple Premise - Prove Me Wrong.

The $8,000 first-time home buyer tax credit combined with those buyers overwhelmingly using low down payment FHA-insured financing = a new default and foreclosure crisis 18 to 36 months from today.

According to the most recent Realtors® Confidence Index, 39 percent of recent buyers purchased a home with a Federal Housing Administration-insured loan. Realtors® who took part in the November survey also reported that the number of first-time home buyers continued to climb to 51 percent.

"FHA helps provide affordable mortgage financing to homeowners, particularly first-time home buyers who are so important in drawing down inventory to help stabilize the current housing market," said NAR President Vicki Cox Golder, owner of Vicki L. Cox & Associates in Tucson, Ariz. "These recent survey results reaffirm that, despite its current challenges, FHA is a critical part of the American housing fabric."

That quote squares with FHA's report that it has seen its insured mortgages grow from under 5% of the mortgage market just a few years ago to more than 20% today.  Oh and guess what else...FHA is in deep financial trouble if the trend continues. The default rate on its insured loans is now up to 7.8%.  (That's High)FHA's loss reserves are down to the lowest level ever...below 2%.  (That's Low)  Get ready for the next big Federal Bailout.

Look, I am a realtor and on one hand I don't want this large part of the market to disappear.  I need to pay my bills too.  But if I am being honest, isn't the fix here exactly what did us in before?  Only this time it is the government over-lending and not greedy wall street bankers.

Without conventional low-down payment loans available, FHA is the only game in town for many first timers or really anyone who doesn't have at least 10% to put down on a house...Americans by and large don't have nest eggs to plunk down on houses obviously based on the number of them opting for FHA financing over conventional. And FHA isn't just for first timers anymore either...loan limits have been raised to allow even more borrowers to get FHA financing.

FHA as a small part of the overall financing super-structure provides a much needed avenue for more home ownership.  When it becomes the primary source and pushes out 3.5% down payment loans in a declining real estate market with job losses, it is a recipe for disaster.

Tell me what you think?  Am I right on or way off?