Tuesday, March 30, 2010

FHA Home Financing Guideline's Tightened?

The NYTimes, in January, reported on the new lending standards required for loans insured by the FHA. If you believe loans are now more difficult to get, read on.

As of December, the F.H.A. was insuring 5.8 million single-family residences that had a total loan balance of $750 billion. More than half a million of the loans were seriously delinquent and heading toward foreclosure.

Many of these troubled loans were made in 2007 and 2008 as the market was plunging. Last fall, the agency said its cash reserves had tumbled to 0.5 percent of its loans outstanding, far below the 2 percent mandated by Congress.

Left largely untouched by the changes is the most controversial aspect of the agency’s program: a provision allowing buyers to make a down payment as low as 3.5 percent. Private lenders these days require at least 15 percent.

Borrowers who want to put the minimum down will now be required to have credit scores of at least 580, a relatively poor figure. Previously, there was no minimum score. But this rule might have little effect. The agency says that in practice, new borrowers already have much higher scores.

There is still a lot of housing supply for sale and so it would seem that the only way this housing supply gets purchased is for the FHA to remain a low quality supplier of mortgage credit. In addition, the US Government has indicated an endless amount of support for Fannie and Freddie. It's getting clearer that the road to recovery is expected to go through the housing market. And it's getting clearer that the FHA can't support a loan portfolio that has nearly ten percent of it's loans severely delinquent. Look for more government support for the FHA soon.

As was pointed out in an earlier post titled "Meredith Whitney on Banks & Housing Deflation", the supply of houses available to be sold is much greater than what is currently shown. This is the shadow inventory of foreclosed houses still held, not listed for sale, by banks. The banks will wait to list them, to avoid flooding the market. In addition to these, Meredith Whitney said there will be a wave of failed mortgage modifications leading to new foreclosures down the road. These will be numerous enough to have an impact on what she describes as banks that are not prepared for another leg down in housing. The result might be more bank failures, further credit tightening and potentially another broad financial recession.

In the meantime, it seems like home financing is still easy, though less than than when anyone could get a loan. From a market timing perspective, it is still buyer beware of how long you will own the property. Long-term owners have less to be concerned about. They may start out being underwater for a few years before eventually getting back to level. This is a new game.