Is Ginnie Mae & FHA Following the Fannie/Freddie Path?
A: Nearly 1 out of every 4 mortgages issued is now being insured by the Federal Housing Administration. With low down payment requirements of 3.5% of the purchase price, some 80% of FHA mortgages went to first time buyers. FHA insures the loan and then Ginnie Mae packages them up and sells them. Does something seem a bit non kosher to you about this? Haven't we been down this road before? So Fannie & Freddie subsidized housing for decades and end up being nationalized by the government. Now FHA steps up and picks up the slack to keep the mortgage markets going and easy money available. With low down payment requirements and higher loan limits to $729,750, the FHA has grown its business from 3% in 2006 to over 23% today. The insanity continues and time will tell if the FHA is following the same path as Fannie & Freddie.
From USA Today, "FHA on track for busiest year as it backs 23% of mortgages":
Almost a year after the federal government launched its rescue of the housing market, nearly one in four new mortgages is insured by the Federal Housing Administration. From Oct. 1 through mid-August, applications for FHA single-family-home mortgages were up 50%, to 2.52 million, from the same period a year earlier. Approvals for purchases, refinancings and reverse mortgages rose 70% to 1.67 million.Did I read that last part right? For those with a credit score UNDER 500, they decide to tighten lending standards from 3.5% down to 10% down? Are you kidding me? What credit scale from hell are these guys using?
FHA loans also have become more popular because of the demise of many subprime lenders, which sometimes allowed buyers to purchase a property with nothing down and no documentation of income.
But as FHA insures more loans, it is also assuming more risk. Foreclosures on homes with FHA mortgages rose to 1.76% in June from 1.6% a year ago, and the default rate — for mortgages 90 days or more delinquent — was 6.88%, up from 5.57%.
"I'm very concerned about risk," says FHA Commissioner David Stevens, who adds that risk is mitigated in part because applicants today are more solid than those in recent years. FHA also has tightened lending standards, requiring a 10% down payment for those with credit scores below 500.
According to Bankrate.com, "By Freddie Mac standards, a score below 620 indicates 'high risk' with an unacceptable credit reputation that could make traditional financing difficult to obtain." If a score below 620 is considered a high risk to Freddie Mac, how in the world is the FHA even giving loans out to those with credit scores under 500? Have we already forgot the severity of the credit crisis that we just went through or are we so desperate to keep the mortgage market and housing market from being disrupted that we are willing to continue gov't subsidized programs that continue to insure very risk loans? I guess I don't get it. In my opinion, every homeowner should have 20% to put down on a home with liquid assets leftover and verified by the lender. Salary should conform to strict standards maxing out around 33% debt/income ratio; ideally closer to 28% or under. If you don't qualify to these guidelines, then you can't obtain a loan and buy a home that you likely could not afford in the first place.
Putting only 3.5% down on a home purchase greatly reduces the borrowers interest in what usually is the biggest investment of their lives. Should the price fall or the borrower run into tough times, the fact that they only have minimal exposure to the property may facilitate a default or encourage the owner to walk away. Requiring 20% down for the purchase in my opinion makes the buyer think twice about the home they intend to purchase, BEFORE THEY PURCHASE IT, and adds some rationale to the decision. Now they have their own money at risk and are less likely to take on a speculative investment or buy a house that they cannot afford. With the banks money, who cares right? FHA is not the only one as Ginnie Mae has been growing even faster! According to WSJ.com, "The Next Fannie Mae":
Only last week, Ginnie announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this “phenomenal growth.”
Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop.
Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.
Is anyone on Capitol Hill or the White House paying attention? Evidently not, because on both sides of Pennsylvania Avenue policy makers are busy giving the FHA even more business while easing its already loosy-goosy underwriting standards.
Then there is the booming refinancing program that Congress has approved to move into the FHA hundreds of thousands of borrowers who can’t pay their mortgage, including many with subprime and other exotic loans. In some cases, these owners are so overdue in their payments, and housing prices have fallen so dramatically, that the borrowers have a negative 25% equity in the home and they are still eligible for an FHA refi. We also know from other government and private loan modification programs that a borrower who has defaulted on the mortgage once is at very high risk (25%-50%) of defaulting again.
With private subprime lenders out of business, the FHA and Ginnie Mae are picking up the slack and very few are talking about it. Ginnie Mae's exposure is expected to top $1Trillion by the end of this year, more than double the portfolio in 2007. The FHA now insures $560Bln or so in mortgages, more than quadruple the portfolio in 2006. The madness never ends and I doubt we have the political will to stop the insanity!
Posted by Ted Schmidt
Wed Sep 2nd, 2009 09:27 AM
The folly of our government is exceeded only by the greed of the oligarchy.
Posted by In Debt We Trust
Wed Sep 2nd, 2009 12:47 PM
Did you see today's front page "Metro" cover? (Metro - the free daily paper given out near subways in the morning or in corner newspaper boxes).
"Downtown so empty even artists can afford it."
Posted by Donald
Wed Sep 2nd, 2009 01:39 PM
The reason why FHA has lax standards for those with credit scores below 500 is because the politicians, mainly people such as Chris Dodd, Barney Frank, Maxine Waters, etc. are putting pressure on FHA and the banks to increase lending or else they will revise old legislation that will allow bankruptcy judges to reduce mortgages, which is the last thing banks want.
Posted by Noah
Wed Sep 2nd, 2009 01:44 PM
Donald - crazy. thanks for the comment. you have any old sources of articles delving into that?
Posted by joedavis
Wed Sep 2nd, 2009 02:56 PM
Hmmm. certainly seems like about as bad a story as every other aspect of the stimulus effort
Should I go get an FHA loan? Even though I have excellent credit?
Posted by Rick Arvielo
Wed Sep 2nd, 2009 04:10 PM
Thanks for the article. Great information
Posted by MeekSheep
Wed Sep 2nd, 2009 08:24 PM
Two pair? Pfft, I have three of a kind. Let's play again. I hear the FHA is insuring...
Posted by Mortgage Pro
Wed Sep 2nd, 2009 11:51 PM
Noah, I have to take exception with the tenor of your discussion. Most mortgage bankers and brokers have been living with a minimum credit score of 620 for some time. Just this week some investors raised their minimum fico to 660. I'm not saying that FHA isn't one of the highest leveraged mortgage products on the market, but to characterize it as sub-prime is just not accurate.
Posted by Noah
Thu Sep 3rd, 2009 09:19 AM
MortgagePro - well the point of the discussion was not to pinpoint FHA as a subprime lender. The point was to show how FHA is now picking up the slack since the subprime mortgage business imploded.
Its nice to see the min FICO requirement raised to 660, but my reaction was to the FHA tightening of standards for those with scores below 500. This seems crazy to me. Your right, characterizing FHA as subprime is probably not accurate, but this administration is clearly seeing pressure to keep the mortgage markets going and likely at any expense. 3.5% down, I cant believe we still even offer a product like that, which is then insured and packaged into a security.
It seems this will bite us in the ass once again in the years to come.
Posted by Leonard C. Tekaat Bakersfield USA
Thu Sep 3rd, 2009 10:01 AM
Sir:
The currant government deficit spending policies (Keynesian Economics) will lead to another inflation economic cycle. We also know that the currant policies to correct inflation have always created a recession or uncontroled increases in prices, an uncontrollable bubble and then an economic crisis when it burst. A balanced approach is a better policy.
I am writing this article today because I feel that you have a good understanding of the primary problem or flaw our economy is experiencing. Enclosed you will find one of many articles that I have written explaining what I believe may be a solution to our economy woes. The other articles are at my web site www.economysflaw.wordpress.com/. If you would like to read the Alternative Economic Stimulus Plan that I have written click on the key word John Maynard Keynes at the above web site.
We need to develop a plan to improve our economy and put a stop to its destruction. We need to convince Fannie Mae and Freddie Mac and other government agencies to start buying mortgages with the terms that are outlined in my article.
Article
Economic Crisis Is Solvable
Home prices are decreasing all over the country. President Obama foreclosure plan is destine to fail. It does not take into account that most homes in CA .NV. AZ, FL. decreased in price by 40% or more. The rest of the country’s housing has decreased in price an average of 30% and continue to fall. His plan only allows for homes to be 25% underwater. The real estate market and the rest of the economy will not recover fully until the consumer’s financial condition and all home mortgages are modified so these homes can be included into the economy. The homes that are underwater cannot be sold or brought until they go through a short sale; foreclosure or the banks and servicing companies forgive, in some manner, the excess portion, of the loan.
The economy needs the real estate market because our homes are the backbone of our money supply, just like gold was many years ago. The reality of the modern world is that we no longer barter to exchange our goods and services. We use paper money or credit. They are both based on promises. If it is credit that you use as a means of exchange, the collateral must maintain its value over a long period of time, similar to gold. Our homes have served this purpose for many years, until people changed policies to create more credit money. Housing collateral is how we provide credit to consumers and small business. If the housing has no equity the banks will not or cannot make the loan.
On our Federal Reserve notes read IN GOD WE TRUST it should read IN THE FED WE TRUST. When the government with its misguided policies and the Fed with its interest rate policies cause the economy to be guided in the wrong direction, they are responsible. If you divert a stream and it does damage to people, you are responsible for paying for the damages. It is not the responsible homeowner's fault if their mortgage is underwater. A lot of people put 20% or more down and they are in financial trouble today because of the government and the Fed. It is estimated that by the end of 2010 ninety present of the homes in California will be underwater with their mortgages. This problem must be corrected quickly or we will have a major problem in our economy.
When the Republicans want to increase people’s disposable income, they want to lower taxes and reduce regulation. When the Democrats want to increase people's disposable income they want to deficit spend, create jobs, create more government programs and increase regulation. Both of these policies reduce government revenues and increase the national debt and the government's deficit, in the beginning of the recovery process. Lowering interest rates does not cost anything and increases more people's disposable income, by a greater amount, much quicker. This policy puts people back to work faster and the problem does not get out of control. The government's liabilities are decreased. We do not have to increase taxes to pay down the national debt or to decrease the deficit. With the correct policies enacted the chance of another housing bubble occurring is practically nil. Read Alternative Economic Stimulus Plan.
On 2-24-09 the Fed Chairman Bernanke, appeared before the Senate Banking Committee. Senator Bob Corker stated during the meeting, “He had not yet heard a definite way out of the economic crisis. That it seems to me that we are continuing to do the same thing as we have been doing. That is, giving large amounts of money to the banks, to capitalize them and nothing happens that benefits the economy.” I agree!
The Fed is currently acting as a bank, regarding commercial paper. In his question and answer session the Chairman stated that, "Because the banks were not confident enough to loan businesses money, the Fed, by paying the banks .25% interest on their deposits, the Fed was borrowing the money from the banks and lending to it to the large corporations. I believe that the solution to the economic crisis is that the same policy should be applied to the housing problem.
If an adjustable rate mortgage was created with a starting interest rate that is low enough (3%) to jolt the economy back to life, the toxic securities will become valuable again, when the new refinanced mortgages become performing assets. The interest rate on these new mortgages should increase one-quarter percent year and cap out at the currant market rate of 5%. To decrease defaults on mortgages, the borrower would have to qualify at the 5% interest rate to obtain the loan. These new mortgages should not be tied to any index. People do not trust indexed mortgages because of the uncertainty of the future. This is why they prefer the fixed rate mortgage. Currently we need lower rates to stimulate the economy. The banks will make huge amounts of money rewriting the mortgages and servicing them. Thereby becoming profitable and help capitalize them. We are currently trying to capitalize the banks by infusing the money directly into them. This policy is wrong because the collateral is losing value. This situation means the banks will need more and more capital to remain viable. The value of the collateral must be stabilized first, for the banks and investors to be confident enough to lend money against it.
What will this stimulus plan do for the economy? When the homeowner refinances their home from a 6% mortgage interest rate to a 3% interest rate their monthly interest payment will decrease by 50%. A $1500.00 monthly mortgage interest payment will decrease to $750.00. That will be like the person receiving a $750.00 stimulus check each month for the first year and thereafter a little less each year for the next seven years not just for a few months like the other plans. Multiply this by millions of people and you will have a stimulus plan that puts the purchasing power were it should be, with the people. Loaning more money to banks does not create demand in the economy, people do.
I want you to ask yourself three questions?
1. What is the first thing the Fed does to stimulate the economy? Answer: Lower interest rates, this permits people and business to refinance their debt at a lower rate of interest, which in turn lowers their monthly payments, freeing up monthly income, which increases their disposable income. With more disposable income, people have money to spend on other things, other than interest payments.
2. Why did it not work this time? Answer: Collateral prices were going down. Banks or investors cannot refinance people's loans until the price of the collateral stabilizes. When the banks and financial institutions did not, would not or could not follow the Fed's lead, of lowering interest rates, it made deflation and unemployment worse.
3. How do we solve this problem? Answer: The banks cannot lower their interest rates low enough because of the risk factor of the collateral's price going down. They have to make a profit and pay a high enough interest rate to keep their depositors satisfied. The US Treasury, which is a not for profit government agency, can borrow the money on the open market or from the Fed, just like the banks do, and fund the refinanced or new mortgages, at near cost, until the collateral's price stops decreasing and investors start investing in the new mortgage securities. The Treasury would receive the cash flow to fund more mortgages. When the economy is up and running again, the Treasury would sell the mortgages to investors. The banks and other financial institutions would arrange these new loans and mortgages or modification agreements. This stimulus plan would not cost the taxpayer a dime.
It has always been the 90% of the population who spends their money and pays their bills that brings the economy out of the recession. When their disposable income increases and they have the money to spend on household goods and services, big-ticket items, autos and trucks ECT.
This plan should be the second stimulus. I would not fund what is left of the first stimulus and modify it to lower the deficit, which would keep interest rates from rising. The reduction in the deficit would calm the world's fears that we will have inflation in the future and that the dollar will be devalued.
My Plan does not rely on a trillion dollar government deficit. In fact the Alternative Stimulus Plan will not cost the American people anything over time. The Alternative Stimulus Plan also includes a policy that will help those people that owe more on their mortgages than what the house will sell for.
Leonard C. Tekaat is a retired economic Analyst, Economic Scholar, Financier, Investor, businessman, author, and a former Candidate for California Congress. He has experience in the financial world of over 40 years.
I am the author of INFLATION THE ECONOMY KILLER (Amazon.com). I had to reverse my policies for inflation control to correct the currant economic crisis. High inflation and deflation are both economic crisis, which are created when the economy becomes unbalanced. The policies to correct them are opposite of each other. Our concern now is the deflation that is occurring in the real estate market, mainly the housing sector of the economy. The housing sector is so important because it is how we provide credit to consumers and small business. The equity in housing is the collateral for the loan. It is the consumer and household formation that creates 75 to 80% of the economic activity in our economy. I realize that there has been some improvement in the economy in the last year but as you have noted we do not want to let our guard down yet. We could very well see another dip in the economy. I believe if we put the complete Alternative Economic Stimulus Plan into practice this will not happen and we will end the misery much sooner.
I hope to hear from very soon on this important matter. My Ph# is 661-619-4858 Fax 661-588-7954 www.economysflaw@yahoo.com
Copyright Sept 1, 2009
By Leonard C. Tekaat
Sincerely
Leonard C. Tekaat
Posted by Donald
Thu Sep 3rd, 2009 10:18 PM
Lawmaker to Lenders: Modify Mortgages, or We’ll Revive ‘Cramdown’ Bill
The chairman of the House Financial Services Committee is threatening to revive stalled legislation that would give bankruptcy judges greater power to revise mortgage terms and even reduce the principal balance if lenders don't start modifying more mortgages.
“People in the servicing industry and in the broader financial industry must understand that if this last effort to produce significant modifications fails, the argument for reviving the bankruptcy option will be extremely strong, and I think there is a substantial chance that the outcome will be different," says Rep. Barney Frank (D. Mass). He chairs the financial services committee.
http://www.abajournal.com/news/lawmaker_to_lenders_modify_more_mortgages_or_well_revive_cramdown_bill/
Posted by Edward James
Mon Sep 7th, 2009 02:27 AM
The credit crisis has been caused by this generation's thinking. When immigrants were coming to US in droves, they came, worked hard, and didn't spend on what they could not afford. If you bought a home back then, you pretty much knew to put down about 30-40 percent down. Before the crisis, no money down was common among many lenders. Common, who did not see this coming?
Posted by Ronald Schmidt
Fri Jan 15th, 2010 10:59 PM
A lot of what Edward says above is true. We've become a nation of "entitlists" instead of hard workers...
Posted by aldytop
Sat May 22nd, 2010 05:59 PM
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