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HUD Secretary Donovan woke up this morning and got himself a gun……

By Jason Burkholder

Real Estate Agent with Weichert, Realtors - Welcome Home

December 03, 2009 08:05 AM

... and he plans to use it to take out the US Housing Market!

I know, very dramatic. Maybe even a little uncalled for. On the other hand, there is really no other way to describe how potentially dangerous the policy changes that HUD Secretary Donovan is proposing this week. What are those changes?

Before I tell you what he is proposing, a little backgorund on my thought process is in order. I work with dozens of home buyers every year. Most homebuyers, like most Americans in this economy right now, don't have tens of thousands of dollars sitting in a savings account. If we did, that would be great! Think of it, if Americans were swimming in cash there would be no healthcare worries, everyone would have excellent credit, all those worthwhile causes could be funded, jobs would be plentiful, all you would ever see are happy, upbeat stories on the evening news!

But that's not the case. We are either at or near the bottom of a recession. Unemployment is rising. Americans are spending less. Costs are going up for utilities, gas, food, clothing, etc. Americans do not have thousands of dollars in the bank. Look at your bank statement and tell me I'm wrong.

Coming up with the cash needed to buy a home is the number one reason most people do not buy. It isn't that they can't afford it, many mortgage payments are lower than rent payments on an similar home would be (at least here in Lancaster County PA). It isn't poor credit, according to Experian the National Average Credit Score is 692. With a score like that, you can usually get an interest between 5.25% and 6% today! The average closing costs on a $150,000 home are between $8,000 and $12,000 before you factor in down payments needed. It's the money, plain and simple.

The government knows this. Want proof? How about a Tax Credit to incentivize people to buy? How about a government program that advances buyers the Tax Credit to use AS CLOSING COST $$? So why is Secretary Donovan trying to kill the progress these programs are making in supporting the housing market recovery? 2813399710_b22bdb6783

Here are a few of the changes to FHA lending that he is proposing:

Reduce the amount of seller assistance buyers are allowed to from 6% to 3%
Increase down payment requirements from 3.5% to 5%
Mortgage insurance premiuims will rise by about 0.75%

So, what we have are proposed changes that, if passed, will require FHA buyers to bring and additional 5.25% to the settlement table. On a $150,000 home, that is an additional $7,875!!!! To put this in the right perspective, in the year 2009 80% of first time buyers used FHA financing. First time buyers accounted for 47% of all homes sold from June 2008 to June 2009. During that same time period, this meant that 39% of all mortgage loans were FHA loans!

How many of those people would not be able to buy if these changes are passed? I agree that loans cannot be made to people that cannot pay them back. But how can the government on one hand enable a program like the Tax Credit and then allow it to be combined with a program like the PHFA Tax Credit Advance program, allowing buyers to buy with ZERO money out of pocket, and then turn around and say what Donovan said, which is that in his opinion buyers need to have more of their own money invested in a purchase to ensure that they don't default on their loans?

Sorry Mr. Donovan, but your proposed changes will do far more harm than good. 99% of the bad loans that got us into this mess are no longer available. Lenders have already changed policies to avoid people over extending themselves. These proposed changes will not do anything positive in the current housing market.

I'd like you to be part of the conversation, so if you like what you read here please comment, forward The Lancaster Connection.com to your friends, subscribe and as always, if you have questions, need real estate advice or want to buy or sell a home, you can call or text me at 717-371-0557, email me at Jason@JasonsHomes.com or contact me at the office at 717-490-8999!

Your Friend in Real Estate,

Jason Burkholder

Weichert, Realtors - Engle & Hambright

Search for Lancaster County Homes for sale at www.JasonsHomes.com by clicking here!

Want to see what's happening to home prices in your neighborhood? Go to www.RealEstateCrystalBall.com !

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Ellen Crawford

Maximum One Executive REALTORS® - Alpharetta, GA

Alpharetta Real Estate Agents & Alpharetta REALTOR

I have mixed feelings on this. First of all owning a home is not an entitlement. On my first homes 20-30% down was required. The interest rates were 15%+. I do not think raising requirements for credit and contributions are unreasonable...in lieu of the next onslaught of foreclosures coming. We need to return to common sense instead of thinking of the next deal for ourselves. After all, our tax dollars back up their losses.

Dec 03, 2009 09:25 AM

Weichert, Realtors - Welcome Home - Lancaster, PA

Associate Broker, Realtor, e-Pro, CMS

Ellen, thank you for reading, I can appreciate that logic and I absolutely agree, making requirements more stringent should help prevent future issues. More stringent for me though, means setting underwriting guidelines and sticking to them. That is what the lenders didn't do 3-5 yrs ago. Changes have been made to close those loopholes already and those risky loans made to people who shouldn't have been able to qualify for a loan to buy a toaster are gone. That problem is solved.

That onslaught of foreclosures you mention isn't just coming from people with no money in a deal, but from all walks of life. A lot of those foreclosures are coming from people who have lost jobs in the poor economy, a higher down payment requirement won't help them. What about people who bought in states like California and Florida who are just walking away because they owe more than their home is worth? A lot of those people bought with conventional loans, with higher down payments and that isn't stopping foreclosures.

Nothing, absolutely nothing, in these changes will stop that onslaught from coming. In my opinion, it is a knee kerk reaction to a probem caused by lax underwriting standards in the previous years and this change, on top of the other changes happening recently, is potentially the straw that will break the camels back.

While I am throwing cliches around, making this change to stop the oncoming foreclosures is like shutting the barn door after the horse ran away. It's too late. What these changes will do is make it harder for buyers to buy these foreclosures (and other great properties), leading to greater inventory, leading to depressed home prices, leading to sellers who are now upside down and can't sell, which leads to more foreclosures. It's a vicious circle. It may come, it may not.

Think about credit worthy buyers though, who have stable jobs, who have low debt to income ratios, who meet all sensible lending standards, but just don't have an extra $5,000. Making it harder for them to buy because they don't have that extra money just doesn't make sense. They won't be able to buy.

Buying a home may not be an entitlement, but then again why is it billed as The American Dream? Why would the goverment propose tax credits to incentivize people to buy if people buying homes isn't important to the economic health of our entire nation? How does forcing buyers to bring more money to the closing table solve the current foreclosure problem? How does it solve the unemployment problem? How does keeping the very same buyers the tax credit is bringing into the market place out of the market help the housing market or the US economy? How do these changes do anything positive for the future?

They don't. Donovan said it himself, these changes are aimed, the upfront MIP increase specifically, at helping FHA avoid insolvency based on current delinquency rates and their lack of capital reserves. So today's buyers will now be paying a premium for the mistakes yesterday's lenders made. Another bailout in disguise, at the expense of the housing market in general.

Dec 03, 2009 11:09 AM

Anonymous

Brian

I'm a little late to the party here, but wanted to comment anyway. I have to agree with you Jason. The proposed changes won't help fix things, but will definitely hurt the market.

FHA guidelines have been fairly stable for many years and have always seemed to work in the past. But when subprime loans became easier to obtain than an FHA loan, that's where everyone went. Now that subprime has died a painful death, FHA is all that's left.

What some people don't understand (most importantly the HUD secretary) is that all lenders are requiring tighter guidelines on FHA loans without any intervention from HUD. And it isn't being done to take the moral high ground, but for self preservation. As an FHA lender, you are required by HUD to maintain a default rate below a specific percentage. If you get above that you are put on a "watch list", for lack of a better term. If you remain there, or get worse, HUD revokes your license.

As most of us know, FHA is the last bastian of loan activity for lenders, particularly when you throw in refi loans. If a lender gets cut off from HUD, they're dead. Something to consider.

Jan 09, 2010 05:31 PM

HUD Secretary Donovan woke up this morning and got himself a gun……

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