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Throwing Gasoline on the Fire: Is There An Even Worse Subprime Disaster Around the Corner?

I couldn't help but wonder if we are throwing gasoline on the fire when a most intriguing comment by a newer member was placed on a recent post of mine about the housing/mortgage crisis. I guess with all the hip-hip-hooraying about FHA coming back on the scene here in California (with higher limits that supposedly will bail out our ailing jumbo market), the similarities to SUBPRIME and FHA never occurred to me. Here is that comment:

Janet: Great analogy and great post but the sage continues only in the form of government subsidizes -FHA and those are direct government (taxpayer) bailouts. NO BAD FICO LEFT BEHIND is their name, no reserves required. It's just the latest scam, once we are under their umbrella we'll know the worst sub prime mortgage was sensible. I am concerned with the government taking over housing period. They can't even build a fence.

Read why Patti thinks FHA IS NOT THE ANSWER FOR THE MORTGAGE INDUSTRY.

Now there is a certain IRONY that I never thought of when it comes to FHA being the savior of the mortgage world. While in one breath we are saying "THE SUBPRIME MESS" is what caused the mortgage crisis, in the other breath we are applauding a government program that allows all the LOOSE guidelines of a subprime mortgage to supposedly save the day.

Is it time to pause and ask, "What is wrong with this picture?"

In a time when values continue to decline, in a time when we all admit 100% financing allowed too many homeowners to go upside down on their mortgages, FHA will allow 97% financing?

In a time when every other lender is imposing declining value restrictions to PROTECT themselves from upside down situations, FHA has NO declining value restrictions?

In a time when we all realize "STATED" anything was stupid, an FHA buyer can have no assets?

In a time when we realize lenders made loans that were too RISKY to people with low credit scores, FHA will loan money to those with low scores? And a fairly recent bankruptcy?

If we all agree that lenders BETRAYED solid lending practices during the REAL ESTATE BOOM, why would we think betraying these practices during a REAL ESTATE CRISIS would be a good idea? Shall we spur the economy on at any price? Or should we heal ourselves slowly with lending practices that are sound?

Gosh, darn it, Patti is right.

They could be using gasoline to put out the fire. And if everything goes up in smoke, the insurance company will be the American taxpayer.

What do you think? Are we letting the government become TOO INVOLVED in the housing market? Are we setting ourselves up for a disaster?

Written by Janet Guilbault, California Mortgage Expert based out of the San Francisco Bay Area

Posted by Janet Guilbault California Mortgage Banker/Broker on 03/26/2008 10:20 AM

Comments (31)

jumbo loans, mortgage crisis, california mortgage expert, fha loan

Post is included in group: LOANS

31 Comments on Throwing Gasoline on the Fire: Is There An Even Worse Subprime Disaster Around the Corner?

MAR

2008

Interesting perspective! In my opinion, the American Taxpayer IS the insurance company!! How quickly we bail out those who have proven their ineptitude at managing money!

You made excellent points about FHA. I'd love to see Belonger chime in and clarify how these guidelines depart measurably from the 'bad' loans of our recent past.

Great post Janet! The comments should be interesting.

Hey Janet, I agree that the government is becoming to involved, but at the same time I don't think that we are going to be able to control their actions. Thanks for the post, Jim

I see where your going with this post but i would rather see the government inputting money back into our economy to strengthen it rather than spend it on a war overseas. It's the basic need or want concept. Our economy needs assistance and i'm sure if we really need troops overseas .Why did we spend 3 trillion dollars on a war and let the U.S. going into a recession???

In a time when values continue to decline, in a time when we all admit 100% financing allowed too many homeowners to go upside down on their mortgages, FHA will allow 97% financing?

Yes, but you have to realize that the debt to income ratio's are significantly lower than conventional. Back in the day with conventional you do 100% with a 55% DTI ratio, maybe even 60%. With FHA you are lucky to get over 40% with 97%

In a time when every other lender is imposing declining value restrictions to PROTECT themselves from upside down situations, FHA has NO declining value restrictions?

Yep. Each loan over 80% is hit with a Private Mortgage Insurance type coverage. This supposedly will protect the lender.

In a time when we all realize "STATED" anything was stupid, an FHA buyer can have no assets?

As long as they make enough. FHA's underwriting procedures are not cut and dry set in stone. They treat each case as a unique case and take into account multiple qualifying factors.

In a time when we realize lenders made loans that were too RISKY to people with low credit scores, FHA will loan money to those with low scores? And a fairly recent bankruptcy?

As long as they have made on time payments for 12 months straight, can qualify at the lower DTI ratio's YES!

Trust me FHA is waaaaaaaaaaaaaaaay better than some of the subprime BS that was going on in the past. The previous problem with subprime is they were putting people into loans they couldn't afford at huigh interest rates that could change. FHA gives the borrower the most aggressive rate out there, in a fixed mortgage and does the due diligence that they can afford the loan.

Casey: Thank you so much for addressing each and every issue. I was hoping someone from the mortgage biz would chime in.

Also, we could do those old subprime loans with stated income. But once someone owes more on their house than they can sell it for, a whole new set of problems crops up that has nothing to do with being able to afford the payment. Now they are stuck being unable to sell. This is when people WALK AWAY. High loan to values are a bad idea when values are declining.

I do not agree that the only problem with the old subprimes was that they were adjustable rate mortgages. The problem was that subprime people do not pay their bills. The problem was that people did not have enough assets to pay the mortgage when a setback occurred.

PS Will the insurance an FHA borrower pays be enough to cover the many thousands of dollars in loss that will occur if buyer defaults?

Charlie: I am questioning whether the way to assist the economy is to apply a loan program that is very similar to the one that just got us into this mess.

It would be like saying this at the start of the war: Hey, remember Viet Nam? There ARE similarities. Should we go there?

Hey Jennifer: Maybe you should ask Jeff to chime in. I have confessed to him many times that FHA was NOT something we used here in California. But due to the higher limits, I have gone through extensive training, all the while cheering on a program that actually has what I would call very loose guidelines for the most part.

Then I read this comment and went, WOW. What are we doing here?

Janet,

ARM's definitely are not the only issue with subprime, but if you were in an ARM and house adjusted 20-40k downward you were stuck with the skyhigh interest rate. At least with a fixed rate you were safe from jumps in your mortgage that is already stretching you thin.

As for the PMI, i am not sure the answer to that. But it ius safer that a 1-2 combo, or the lenders would still be offering these.

Great post and Great topic! I could talk for hours on this stuff! I LOVE IT!

Janet,

I agree the government should not enable the people who cannot afford to purchase. I heard John McCain make the same statement, "the government will not bail out the sub-prime mess if I am elected President"! I know that he is the only candidate that takes that position.

Yes, Mike, I just read that he is the one who is standing strong against bail outs.

What do we accomplish when we allow someone who cannot qualifiy (according to the free market economy i. e. private lenders) to qualify some other way? Are we really doing them a favor or setting them up for disaster?

I realize every subprime case is not the same, but we all now know the destruction that can occur as a result to allowing the lending criteria to fall to the cellar.

Do we just accept that a percentage of these loans will go bad and call that the price of getting Americans into home ownership no matter what the cost to taxpayers?

As for the PMI, i am not sure the answer to that. But it ius safer that a 1-2 combo, or the lenders would still be offering these.

Would FHA be offering what it is offering if it were a private lender? I think not.

I guess I don't see FHA as a bailout. All they did was raise their maximum loan amounts. Everything else has stayed the same. People who don't pay bills can' get one of these mortgages as you have to have 12 consecutive months of on-time payments to qualify.

Yes Janet, most of the time when we let government take control of a crises where they don't belong things can turn into a disaster.

Casey, I do see your point. But before, with so many other lenders around, FHA was not used in many areas. Now, every mortgage broker in the country is jumping on the FHA bandwagon trying to help all those subprime borrowers that can no longer get financing any other way, or those who cannot get jumbo money any other way.

I think it is safe to say there will be alot more FHA loans coming into the pipeline.

No one in our office ever did an FHA loan. Now all 21 of our offices are getting extensive training.

Please forgive me for having such a bad attitude about subprime. It is the subject of another whole post, but let me just say I delveloped a bad taste in my mouth for subprime as a result of doing car loans and leases for many years in conjunction with a credit repair agency. I finally threw in the towel on subprime.

I don't think on time payments for 12 months means squat. Sorry, but once a credit criminal, always a credit criminal. Sure you can lose weight, but slipping into your old eating habits is a STRONG possibility.

Very intersting post and comments Janet. I don't have anything to add but will sit back and read and learn I thought Casey's comment was very good and makes some valid points.

I don't see the risk with more loans going to FHA "INSURED" financing. First off, if the defaults increase, the MIP will be increased. It was just recently reduced to 1.5%, where it was for some years, 2.25%. They can raise it back up to cover the losses.

Further, FHA appraisals are far stricter than conventional, even conventional with the good old 80/10/10s or the 90/10s. It's the first trust the the appraiser looks at. FHA appraisals are tough. In fact, I don't see how many of these new high price FHA loans are even going to get an appraisal. Have they removed the guideline that the appraiser needs at least one government. The FHA market disappeared in my area when prices were escalating faster than the speed of light. Couldn't get appraisals.

I don't see the connection between sub-prime and FHA. FHA Arms are limited to 1% a year and only 5% over the life of the loan, or have they changed that??? FHA ARMs are priced better than sub-prime arms, or have they changed that?

I just don't see a connection.

Lenn: I do not profess to be an FHA expert, but we certainly have those that are FHA experts around the rain so perhaps they will comment. Jeff B., where are you when we need you?

FHA disappeared in my area as well, but has arrived on the scene as our savior. Appraisals (in this area) are not strict, and compare to regular appraisals.

We are NOT using FHA for arms. We are using it for 30 year fixed rate loans.

The connection as I see it is this: no other private lender allows such low scores, with such loose guidelines, at such a high loan to value. If someone with no assets and poor credit gets a 97% loan to value loan, and the market declines another 10%, you have someone who is underwater, with very little invested, and no reserves.

Having said all of this, the insurance premium that must be paid up front on these loans does insure against defaults.

"The connection as I see it is this: no other private lender allows such low scores, with such loose guidelines, at such a high loan to value. If someone with no assets and poor credit gets a 97% loan to value loan, and the market declines another 10%, you have someone who is underwater, with very little invested, and no reserves."

In regards to this quote, if the market does dip 10% and the client is in a 30yr loan and did qualify at the strict debt-to-income ratio that FHA instills - they should be fine! They are in a fixed mortgage and should be able to budget their monthly payment into their expenses rather easily! The mortgage isn't going to adjust on them when they are upside down. Now the buyer needs to think through their purchase and make sure it is a place they want to be in for 5-10 years.

Janet, I understand your concerns and agree with a lot that you have to say. FHA never left our area. I guess time will tell...we can only hope for the best!

Let it run its course. It like putting out fires before they are finshed. Take away the fuel. Houses need to be more affordable. You have to remeber that all areas are not having the problem but are going to suffer. Most people in New Orleans could not afford loans so we have have avoided the sub prime issue to a great degree than most. Be glad your homes are dry.

Quite frankly, I don't think any one program is the answer. And I'm to the point that I just don't care anymore. I just want some financing options for my buyers.

MAR

2008

Janet, I agree with both Casey and Lenn. In this case, the Gov't is not handing out money to low risk borrowers. The downside is when the market continues to decline and the borrower has to sell. This is a whole lot better than when brokers where selling sub prime mortgages. Would brokers do it again? Yes. When there is money to be made, you better have controls. Personal ethics will not be sufficient. AJ

This is a tough one...We can only hope it rights itself..or the ship will go down!

Good post, Janet. When the government becomes the most-lax mortgage lender, it makes me wonder what they think they know that the banks don't.

MAR

2008

Great viewpoint Janet. I agree with Casey on each of his points from above. I would like to add that the recourse that HUD has with lenders is pretty cut and dry. If underwriters cannot justify the reason for going out of the box, and a file goes into default, the taxpayers have some protection. Furthermore, if these properties are foreclosed on, and they go to auction, the difference between the sale amount and the balance can be recaptured by HUD from the lender, if the guidelines weren't followed.

Also, we regularly watch the rates of our borrowers. We switched away from FNMA last February because we thought the declining market policy would kick in early 2007. Since then, all purchase loans that qualified were done FHA. When rates take their dips, we streamline refinance these people to lower rates with a premium priced loan. Right now, with no job and an upside-down home, we can refinance a person at 6%, covering all closing costs.

FHA is not the new subprime loan. Although score doesn't impact a loan on FHA (much), you cannot have poor credit. Just because a person has paid their bills on time for 12 months doesn't mean that FHA has to cover a loss, the guidelines state that there are no set in stone standards but that generally, ... If the underwriter approves a loan with teired risk factors, they will have to cover any loss that occurs.

FHA is not the problem, it's the idiot lenders that tout it as a product that loan officers can use to "get anyone qualified!" Sadly, these crack pushers are just like the ones that gave MTA's and ARMS and Interest only a bad name by teaching LO's to put profit before prudent borrower analysis and consultation.

All the lenders that are jumping on the FHA bandwagon will be in for a surprise at their first audit if they're not careful. They will be the first to have to step up to the plate and cover foreclosure deficiency amounts or they will lose their ability to transact FHA.

Right now, with no job and an upside-down home, we can refinance a person at 6%, covering all closing costs.

Mark: How are you able to do this? What do you mean when you use the term streamline refinance and premium priced loan? I'm sorry! I did not understand this one paragraph of your comment, and yet it is probably the most important one. Please elaborate.

And thank you so very much for your comment. You helped me learn something about the inner workings of FHA that I did not know. I was unaware that a lender must absorb the risk you described when underwriting the loan.

If I understand you correctly, you are saying that if an FHA loan does default, they first look back to the lender and how the loan was underwritten? What about the MIP?

Our lenders are not touting FHA as a product that loan officers can use to qualify anyone or as an alternative to subprime. This is also not the mantra among the mortgage brokers in my office. But it does occur to me that FHA will get a slew of loans that can be placed nowhere else...especially because of high LTV allowed....from areas(like mine) where FHA has been dormant for years.

Casey, thank you, and of course you are correct. They do have a strict DTI and more importantly, it is a fixed payment loan.

I guess one of my problems is when you say they should be able to budget. Many years of dealing with poor credi (in the car business) gave me the perception that the whole reason they have bad credit is they did not budget!

But as you correctly pointed out, they are in a fixed loan, and can just continue to pay the loan even if the value of the house goes down in value. In fact, maybe NOT being able to tap the equity (therefore raising the payment) is a good thing

Excellent post We need to question current events before drinking the KoolAid! I've talked to many that feel the most recent changes are meant not for the consumer but for the banks who are really in trouble! In many ways the higher limits may allow:

The seller to reaffirm the debt in a home that is no longer worth it!
May artificially prop up falling home prices for the short term.
May be a sucker's raly pulling in a few uneducated buyers that take a few homes off the hands of the bank!

Jim is correct that the recent changes benefit the banks but were pitched to the public as a benefit for the consumer. I wholehartedly agree that there is the potential for the increase to artificially prop up falling home prices. I say potential because I fear that it will become a sucker's rally and that the FTHB's will get stuck with overpriced homes.

Janet - As far as your question goes, FHA streamline refinances require no job, no appraisal and as long as the mortgage is paid on time for the past 12 months, they can be delinquent on everything else. The thought is a valid one. If rates go down, and FHA is insuring the loan now, a lower rate will give the borrower a higher probability of repayment so therefore, there is no requalifying to get the lower rate.

I had to respond with a blog: http://activerain.com/blogsview/443484/Blue-Ink-vs-Red

Chaz...will check it out right now.

MAR

2008

It is scary when the government is getting involved with EVERYTHING. It is getting scary.

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