FHA Announcements ~ Will It Help Or Further Deal A Blow To The Recovery?

By
Real Estate Agent

 

This week we greeted David Stevens of HUD as a new member here on Active Rain. 

We are all glad he has brought Washington directly to us. 

  • Hopefully he will interact with us. We are the professionals who actually have our fingers on the pulse of the real estate market.  170,000 strong makes us a viable resource for the government to liaison with.


His blog Todays Announcements  gave us a view of the changes being implemented in FHA.  The measures being adopted are to raise the 2% minimum reserves while at the same time, "making sure not to overly, adversely, impact this housing market at a critical time"

One of the changes involves the "seller funded downpayment assistance" or SFDPA. These modifications will be rolled out about the time the $8,000.00 stimulus for first time home buyers will end. 

  • Not wishing to sound like a prophet of doom, but I personally believe, from my own practice, this will be disastrous to the recovery of our market.


The years of 2006, 2007 and 2008 are being cited as the worst years, as they relate to the current trend in mortgage foreclosures.

  • Let me preface my remarks by saying we do not have one real estate market.  This is not a GM or Chrysler.  Real Estate conditions differ from state to state, and region to region. One size does not fit all.
  • Some states are showing signs of recovering, while others are not.Some regions are doing well, while others are languishing.  Agents may not view the market exactly a like, and their experiences will reflect that in their comments here.


I have past clients who are now having problems with mortgage payments, who indeed bought their homes during those years.  I can assure you it is not due to bad money management.  It is due to unexpected and prolonged unemployment.


The majority of people walking away from homes are not doing so because of low mortgage insurance rates, or a 6% seller assist. They are doing so because they have no options.  Tightening restrictions on FHA loans is like trying to put a finger in a dike that has already split wide open.

  • I have several clients who have tried in vain to get their mortgage holders to modify their mortgages or assist them in staying in their homes.  Some people I know have already lost their homes while trying earnestly to get the bank to work with them. The homes were FHA loans.  It appears the banks would prefer to foreclose than work with customers.


One of the biggest banks who is guilty of this, just repaid the money they received from the stimulus. It was a big deal in the news recently. I wonder if foreclosing for them is a bigger profit center, than working with homeowners to modify their mortgages? If the mortgage is insured, at least partially, then I imagine it's a pretty big incentive for the bank to grab the property and market it themselves.

  • The underwater home to the homeowner, is not underwater to the bank.  The bank will receive a payment from the federal governemnt under the FHA insurance program to offset the difference between the mortgage and the ultimate sales price.  Addtionally, the bank is able to add more fees and costs for executing the foreclosure.   

Making big bucks while putting folks out in the street.   NO WONDER THE RESERVES ARE LOW!

  • Many homeowners have been trying to work through the red tape up to six months.  The banks are not cooperating.  The Mortgage Recovery Act is a dismal failure.  It was an olive branch floating on a swift moving current.  Nearly impossible to reach out and grab onto.
  • The only time the banks actually communicate is when the individual goes to a Credit Counseling Service, hires an attorney to represent them or files a Chapter 13 Bankruptcy.  That just puts more costs on the back of the taxpayer.


I do not know of an FHA mortgage that permits the seller to contribute to the downpayment.  The 6% seller assist in Pennsylvania, where I practice, is not a contribution from the seller.  It is essentially borrowing the closing costs and putting them on top of the loan.  The seller gives nothing to the buyer from their pocket.

 

  • Frankly I do not see how this is causing a high default rate. Perhaps there is something I am missing.  A buyer qualifies for a $132,000 mortgage.  They buy a home for $125,000 and roll $7,000 in closing costs on top.  The buyer puts 3.5% of their money down. It is now less than the $132,000 mortgage they qualified for.


  • Does paying out of pocket 3% more for their closing costs insulate them from default if they lose their job?

 

What is causing the unprecedented rate in defaults is two fold.

  • One: the high rate of unemployment in this country that shows no signs of reversing. 
  • Two: the market devaluation which put homes under water and are not sale-able unless via a short sale.


The number of short sales and foreclosures continue at an unprecedented rate.  We already have a glut of inventory that is barely moving in some regions.  The foreclosures further drive down the market and the values in neighborhoods. More are coming and we have no counter measures to reduce their negative impact.

  • Buyers ask first about bank owned and foreclosures in hopes of snagging a good deal. That is not healthy for our market.  It causes other sellers to deeply discount their properties in desperation to move on. 


After the sale, that seller should become a buyer in another market when they move.  Now we are hearing many of those potential buyers are scared to buy.  They fear the new area they are moving to will continue to slide downward, and they will find themselves in a negative equity situation.

  • Discontinuing the stimulus plus reducing the seller assist is going to further weaken the Real Estate market recovery.   The majority of the buyers working with us and other agents in our Board are first time home buyers. 


  • We are in a part of the country which is economically depressed,and has always been below the national average in wages.  Our average home sale is $150,000 or less.


                                 Address the root of the problem

Make it mandatory for banks to work with home owners trying to stay in their homes.  Get rid of this log jam.  Impose penalties for banks who do not process applications in a pre-determined amount of time.

Actually it would be more equitable to take the decision to modify out of the hands of the bank.  A federal department or panel who is neutral, and does not have a vested interest in the outcome, would be more fair to a homeowner. 


Put the emphasis of this Administration on creating jobs and eliminating unemployment so people are able to pay their mortgages.

           The only way to heal and recover  - is to stop the bleeding!

__________________________________________________

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Topic:
Mortgage / Finance
Location:
Pennsylvania Lackawanna County Scranton
Groups:
Realtors®
Silent Majority
Pennsylvania Realtors
"Whacked"!!!
Tags:
fha
stimulus
fha loan changes
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Rainmaker
383,599
Kevin Robinson
Twin Falls, ID
Fractional Developer

Nice ideas Bonnie. Our area is just starting to get hit. Home prices were at $200 per sq ft in '06, now quickly dropping towards the $100 mark. The biggest reason here is the unemployment. This has always been a hotbed for small biz and they are dropping like flies. In our area the new line is "will the last one to leave please turn off the lights?".

Jan 24, 2010 11:58 PM #1
Rainer
340,963
Kris Wales
Keller Williams Realty - Lakeside Market Center - Macomb, MI
Real Estate Blog & Homes for Sale search site, Macomb County MI

I can only speak from my gut about my region (Metro Detroit):  It's going to hurt.  Big time hurting.

Jan 25, 2010 12:00 AM #2
Rainmaker
100,391
Stephanie McCarty
McCarty Homes - Canton, GA
REALTOR

Very well written and you make some good points.   I don't see anything that the FHA is doing as a move toward helping people - some of the changes will only help the banks and FHA. 

Unemployment is the problem and I agree that we are now at the point where there are more foreclosures from job loss than people getting in over their heads to begin with.  

It is hard to see an end in sight for real estate or this economy.   Alot of pain ahead for all of us and to deny it is to be completely unrealistic about what drives a healthy economy and keeps people in their homes.  

Jan 25, 2010 12:31 AM #3
Rainer
83,069
Bonner Thomason
Keller Williams Realty - Kernersville, NC
CRS, ABR, GRI, e-Pro

It is going to be slow steady increse that needs help and contribution from everyone.

Bonner

Jan 25, 2010 12:42 AM #4
Rainmaker
244,734
Bonnie Vaughan
Scranton, PA
CNE SFR - Buyers/Sellers - Lackawanna & Surroundin

Kevin the only building that seems to be booming in Va are the malls and the sprawling shopping areas.  It boggles the mind.  People losing homes and more stores opening.  Many like spas, small eateries and hobby shops are going out in a couple of months.  What are people thinking?  Why open a risky business in this climate?  I'd love to have the dollars they invest in a doomed enterprise.

Jan 25, 2010 01:36 AM #5
Rainmaker
244,734
Bonnie Vaughan
Scranton, PA
CNE SFR - Buyers/Sellers - Lackawanna & Surroundin

Kris, We practice in the Scranton Pa area.  Coal country.  The market is sluggish now.  This is not going to be pretty.

Jan 25, 2010 01:37 AM #6
Rainmaker
244,734
Bonnie Vaughan
Scranton, PA
CNE SFR - Buyers/Sellers - Lackawanna & Surroundin

Stepanie. Thank you for commenting.  The fixes seem to be aimed from the top down, not the bottom up.

Jobs Jobs Jobs.  What part of that is difficult to understand?

Jan 25, 2010 01:38 AM #7
Rainmaker
244,734
Bonnie Vaughan
Scranton, PA
CNE SFR - Buyers/Sellers - Lackawanna & Surroundin

Bonner, the biggest boom to our economy would be job creation.

Jan 25, 2010 01:40 AM #8
Rainmaker
830,902
Broker Nick
South Florida Real Estate & Development, Inc. - Coconut Creek, FL
Broker Nick Relocation Broker Service

 

Congratulations this post is now featured in the Silent Majority Group of Active Rain.

Jan 25, 2010 05:29 AM #9
Rainmaker
565,685
Mike Saunders
Lanier Partners - Athens, GA

Bonnie -first, do you have the link to Stevens outside blog, everything of his here has been shut down?

 Second, I am in partial agreement with you on this. I thought seller funder dpa went the way of the dodo last year. Although there is a reduction in the seller contributions to closing costs from 6& to 3%. I did an analysis of this last week, on one of my other blog sites, and for a $200,000 loan, this, plus the increase in Mortgage Insurance required at close, the buyer will have to come up with an additional $7000 ($1000 for increase premium and $6000 because of lost closing contribution).

However, here is where we split. You wrote The 6% seller assist in Pennsylvania, where I practice, is not a contribution from the seller. It is essentially borrowing the closing costs and putting them on top of the loan.

It is not increasing the value of the home, but is adding to both the buyers liability and the lenders risk. If a home appraised at the purchase price, adding 6% on top of that does not make sense. However, if the home does appraise for more than the sales prices, there is a bit less risk. Historically, many of the loans that were 125% of the home value are those in default.

I do think it will impact sales/purchases. However, if we can mitigate the employment issues, the impact of this will also be mitigated. But yes, we will be getting hit with a double whammy when both the tax credits expire and the new rules kick in. This will certainly be anti-stimulative and the current 17% m2m drop we just experienced might be surpassed by the drop we experience in July and August.

Jan 25, 2010 08:18 AM #10
Rainmaker
1,052,846
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

I find it ironic that FHA is implementing these changes to shore up its financial situation while at the same time, Washington extended and expanded the $8000 tax credit and FHA waived the 90 day no flip rule.

Jan 25, 2010 08:41 AM #11
Rainmaker
344,530
Yolanda Hoversten
Berkshire Hathaway HomeServices Elite Properties - O'Fallon, IL
Broker - O Fallon, IL Real Estate
Jan 25, 2010 10:27 AM #12
Rainmaker
565,685
Mike Saunders
Lanier Partners - Athens, GA

Yolanda - thanks, Bonnie's link wasn't working and searching on his name indicated he had shut down his account.

Jan 25, 2010 10:51 AM #13
Rainer
67,579
Jay-Paul Lowry
Riverside, CA

mike - his account seems to be working for me.

 

JP

Jan 25, 2010 11:16 AM #14
Rainmaker
565,685
Mike Saunders
Lanier Partners - Athens, GA

JP - it appears to be working now

 

Jan 25, 2010 02:45 PM #15
Rainmaker
244,734
Bonnie Vaughan
Scranton, PA
CNE SFR - Buyers/Sellers - Lackawanna & Surroundin

thanks for the feature Nick

Jan 25, 2010 03:34 PM #16
Rainmaker
244,734
Bonnie Vaughan
Scranton, PA
CNE SFR - Buyers/Sellers - Lackawanna & Surroundin

Mike,  In my mind it's a matter of semantics. If the home is on the market at $135,000 and is comparable to other homes, and the sales price is $125,000, add $7,000 for seller assist and it is still below the comps.

We have had apprisals with seller assist come in lower than the contract price.  We caution our buyers they run the risk of the property not appraising. 

In my market we are talking a few thousand dollars. In the past appreciation countered the seller assist.  I really think it will further depress my market.

Jan 25, 2010 03:41 PM #17
Rainmaker
244,734
Bonnie Vaughan
Scranton, PA
CNE SFR - Buyers/Sellers - Lackawanna & Surroundin

Rob,  If banks were not so anxious to foreclose the reserves would not be at 2%.

Jan 25, 2010 03:42 PM #18
Rainmaker
244,734
Bonnie Vaughan
Scranton, PA
CNE SFR - Buyers/Sellers - Lackawanna & Surroundin

Yolanda,  The link I used was to Today Announcements.  I think that blog got taken down and replaced by the other one.  I think I fixed the link.

Jan 25, 2010 03:44 PM #19
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