The FHA is raising the insurance premium on the loans it insures. This will make FHA bids lower and may impact low-end pricing.
Irvine Home Address … 263 TANGELO #354 Irvine, CA 92618
Resale Home Price …… $298,900
Divided by destiny
Torn between death and doom
Destruction by decision
Fate shows me my open tomb
Trivium — Torn Between Scylla and Charybdis
The FHA has to navigate the waters between qualifying enough borrowers to absorb the foreclosure inventory and qualifying too many borrowers who fail to make their payments and end up as foreclosures. If they error to the conservative, house prices fall because demand is curtailed. If they error to the permissive, the government is going to pay for a huge bailout.
The FHA stabilized the housing market by providing low-interest and low down payment loans to buyers when private institutions were unable and unwilling to do so. The FHA's market share typically runs from 8%-10% of the market, but it fell to 2% during the housing bubble as asset-backed security (ABS) loans took its market share. In the aftermath of the credit crunch and the withdrawal of private investment from unbacked mrtgages, the FHA's market share has climbed to over one-third of the mortgage loan market. The FHA and the GSEs insure over 95% of mortgage loans in the United States.
Since the down payments on FHA loans are only 3.5%, there is no real equity cushion for borrowers. After transaction costs, borrowers are 2.5% underwater when they leave the closing table. The lack of equity contributes to strategic default, particularly in markets that have continued to decline since FHA loans became prevalent.
To combat the problem of losses on FHA loans, Congress just passed an increase in the FHA insurance premium to help head off a government bailout. I have my doubts about how successful they will be — or if anyone in government really cares.
Bill to Let FHA Raise Annual Premiums Heads to Obama
The Senate approved its versions of HR 5872 and HR 5981, which would respectively raise the Federal Housing Administration's (FHA) multifamily commitment authority and allow it to hike its annual premiums for its single-family program.
Both bills now travel to the desk of President Barack Obama to be signed into law.
HR 5981, which also passed the House of Representatives last week, would allow the FHA to raise its annual premiums for the single-family program, raising the statutory cap rate to 1.55% from 0.55% — a flexibility that could ultimately reduce the cost of credit insured by the FHA, according to the Mortgage Bankers Association (MBA).
"While premium increases are never ideal, this bill was necessary to help improve the strength and stability of FHA's single family programs," said MBA chairman Robert Story Jr. "We are encouraged that FHA Commissioner [David] Stevens has indicated he may not need to raise premiums to the maximum, and we believe that that a small increase in the annual premium, coupled with a decrease in FHA's upfront premium [calculated in the chart below, from the FHA], will help stabilize FHA while lowering closing costs for many borrowers."
The annual premium raise will provide approximately $300m of additional insurance per month to the FHA's Mutual Mortgage Insurance (MMI) Fund, according to Stevens.
"I thank Congress for giving FHA the flexibility to adjust its annual premium at a time when our reserves are perilously low," he said. "With this authority, FHA is in a better position to address the increased demands of the marketplace and return the MMI fund to its congressionally mandated level without disruption to the housing market."
Stevens added: "While we appreciate and applaud this recent action, there is still work to be done. [The US Department of Housing and Urban Development] remains steadfast in its commitment to comprehensive FHA reform legislation, similar to the FHA Reform Act passed earlier this year by the House, which would further enhance FHA's lender enforcement capabilities and risk management efforts."
The MBA noted that the broader FHA Reform Act passed the House in June but has yet to be considered by the Senate.
HR 5872, which passed the House of Representatives last week, increases FHA's commitment authority for its multifamily insurance programs by $5bn for the remainder of the fiscal year — which ends at the end of September.
Without the increase, the FHA would have exhausted its current authority sometime in mid-August, according to the MBA.
I have advised people to Use FHA Financing: Loan Assumption is the Appreciation of the Twenty-Teens. Of course, the ability to assume a loan and only put 3.5% down comes at a price. As that price continues to go up, the advice may become less valid.
The advantage and value of assumability becomes greater the more interest rates go up. If five or ten years from now we are back at 9% interest rates, an assumable 4.5% interest rate will have significant value. If we are still in the 5% to 6% range, assumablity won't make a significant difference.
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FHA Set To Increase Annual Mortgage Insurance Premium 
By Jessica Holzer — Thursday, 5 August 2010
… The FHA doesn't make loans; it backs mortgages for borrowers who pay a minimum 3.5% downpayment and meet the agency's other standards.
People often misunderstand the role the FHA plays. It does not actually make loans, it merely provides insurance to loans underwritten to a certain standard. IMO, this is the ultimate fate of the GSEs — if they survive at all.
"I remain cautious because the big uncertainty is what house prices are going to do," Stevens said.
The FHA's business has ballooned during the housing bust as home buyers have struggled to get conventional financing. The agency's market share rose to about one-third of the mortgage market last year, up from 2% in 2006. Together, the FHA and government-run mortgage insurers Fannie Mae (FNMA) and Freddie Mac (FMCC) are providing backing for more than 95% of new U.S. mortgages.
In an effort to shore up its finances, the FHA has expelled more than a thousand lenders from its program in recent months and tightened its credit standards. For example, it now requires borrowers with down payments of less than 10% to have credit scores of at least 580.
A 580 FICO score is not a particularly high standard.
Still, many critics argue the agency needs to go much further if it wants to avoid a taxpayer bailout. House Republicans pushed unsuccessfully earlier this year to raise the minimum FHA downpayment to 5%.
The reason the increase to 5% was defeated was due to the fact such and increase would have dramatically diminished an already depleted buyer pool. Most FHA loans have the bare minimum 3.5% down payment because so few people have saved any more than that.
Stevens said the higher premiums are "a significant step" for attracting private capital back to the mortgage market because private mortgage insurers were having difficulty competing with the government's pricing.
Do we really need a large private mortgage insurance market? Is there something wrong with the FHA standard? Call me a socialist if you like, but I don't have a problem with the government providing insurance that crowds out the private sector. If the government does a good job, the insurance is much less expensive, and if it doesn't do a good job, the private insurers can fill in the gaps.
But he acknowledged that, in the current environment, the private sector doesn't have much appetite for mortgage risk.
No kidding.
According to Mortgage Bankers Association Senior Vice President Steve O'Connor, "The FHA is still going to be the only game in town in the near term for lower-income and cash-strapped borrowers."
In other words, the FHA is the only game in town. After the huge debt orgy we witnessed during the bubble and the ugly recession that followed, everyone is cash-strapped.
The hardest working condo yet
The people who bought at the bottom of the last cycle in 1997 obtained the full advantage of the housing ATM. For those that utilized it, they managed to spend every penny of appreciation. It is more convenient to sell the property to the bank over and over again while prices go up because the bank will still let you live there after prices go down and you quit paying. Plus, you can still consider yourself a homeowner even though all you really have is a loan with no equity. Banks really did make the deal irresistible.
- The previous owner of this property paid $93,000 on 2/24/1997. They used a $50,000 first mortgage and a $43,000 down payment. At least it started out well.
- On 12/28/2000 the owners obtained a $55,000 HELOC and pulled out their down payment plus a few bucks spending money.
- On 7/12/2001 they refinanced with a $111,000 first mortgage.
- On 3/3/2003 they refinanced again with a $155,400 first mortgage.
- On 3/1/2004 they obtained a $70,000 HELOC.
- On 8/27/2004 they refinanced the first mortgage for $276,000.
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On 1/26/2005 they obtained a stand-alone second for $67,800.
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- Total property debt was 343,800.
- Total mortgage equity withdrawal was $293,000 including their down payment. That is an astonishing amount on a small condo.
- Total squatting time is difficult to measure. They went delinquent in early 2007, got a loan modification, and re-defaulted in 2010.
Foreclosure Record
Recording Date: 05/19/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 02/16/2010
Document Type: Notice of Default
Foreclosure Record
Recording Date: 11/08/2007
Document Type: Notice of Rescission
Foreclosure Record
Recording Date: 08/13/2007
Document Type: Notice of Default
Irvine Home Address … 263 TANGELO #354 Irvine, CA 92618 
Resale Home Price … $298,900
Home Purchase Price … $230,000
Home Purchase Date …. 6/8/2010
Net Gain (Loss) ………. $50,966
Percent Change ………. 22.2%
Annual Appreciation … 168.0%
Cost of Ownership
————————————————-
$298,900 ………. Asking Price
$10,462 ………. 3.5% Down FHA Financing
4.60% …………… Mortgage Interest Rate
$288,439 ………. 30-Year Mortgage
$59,103 ………. Income Requirement
$1,479 ………. Monthly Mortgage Payment
$259 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$25 ………. Homeowners Insurance
$250 ………. Homeowners Association Fees
============================================.jpg)
$2,013 ………. Monthly Cash Outlays
-$136 ………. Tax Savings (% of Interest and Property Tax)
-$373 ………. Equity Hidden in Payment
$18 ………. Lost Income to Down Payment (net of taxes)
$37 ………. Maintenance and Replacement Reserves
============================================
$1,559 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$2,989 ………. Furnishing and Move In @1%
$2,989 ………. Closing Costs @1%
$2,884 ………… Interest Points @1% of Loan
$10,462 ………. Down Payment
============================================
$19,324 ………. Total Cash Costs
$23,800 ………… Emergency Cash Reserves
============================================
$43,124 ………. Total Savings Needed
Property Details for 263 TANGELO #354 Irvine, CA 92618
——————————————————————————
Beds: 2
Baths: 1 bath
Home size: 864 sq ft
($346 / sq ft)
Lot Size: n/a
Year Built: 1978
Days on Market: 23
Listing Updated: 40371
MLS Number: U10003021
Property Type: Condominium, Residential
Community: Orangetree
Tract: Cm
——————————————————————————
Welcome to the quiet and secluded Orangetree community of Irvine. This cozy 2 bedroom, 1 bath condo features an additional bonus loft with extra large storage room. Fully upgraded kitchen features new countertops and appliances, newer flooring and cabinets, and an open layout, perfect for entertaining. The living area features original hardwood flooring, a spiral staircase leading to the loft, and a large sliding door that allows for plenty of natural sunlight opening to a large outdoor patio space. The bedrooms have been upgraded with new paint and carpet and the bathroom features new porcelain tile flooring, fixtures, and stainless steel detailing. Enjoy the scenic views and peaceful sounds of the flowing creek just below your patio while you BBQ with friends!
I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.
Have a great weekend.
Irvine Renter
Has this already been auctioned? In relation to yesterday’s post, if you pick up rental properties at auction, and have a quality contractor to rehab if needed, the proposition becomes a lot more appealing.
why does the government keep borrowing? I am really confused.
The federal government keep borrowing 1.4 trillion a year. I am curious why not just print that much of money and become debt free?
We owe China 1 trillion, why not just print that much money and transport there. What will happen if we do that??????????
Why bother keep borrowing???????
Because the Federal government can not legally print money which it does not already have.
Strike that…only the Fed Reserve Bank has the authority to *print* USD. The Fed *govt* can only issue Treasurys which the Fed Reserve Bank can buy using……..you guessed it: USD.
Correctamunde.
So, the our Federal Government has to borrow money from the Fed, where as the Federal Reserve, a private corporation owned by the member banks, can create as much money as it wants.
Germany did that after the first world war – did not work out too well 😉
http://realestate.yahoo.com/promo/housing-markets-that-will-be-strongest-by-2014
Housing Markets That Will Be Strongest by 2014
“By early 2014, they will have climbed about 7.2 percent from 2010 levels”
“Bremerton-Silverdale area in Washington State had the highest four-year growth forecast, with prices expected to increase 44.7 percent from 2010 to 2014.”
Buy now or be priced out forever!!one!!1!
I know Bremerton and Silverdale (Kitsap Cty) very well.
You don’t want to move there.
Talked to someone who lived in Bremerton as teen. Her dad was an airline pilot. She would take a free flight on the weekend to somewhere, anywhere, because a hugely long plane flight just to walk around for an hour or two somewhere other than Bremerton was worth it.
Couldn’t she just take a ferry ride to Seattle for the weekend instead (or is there none)?
Look the youth of America being screwed by the baby boomers, banks, and government. This was bought for less than 100K, with 4% inflation from 1997 to today it should be less than 150K and some one has to buy this hole for 300K Thanks for screwing the whole thing up.
This is the main problem that I have with articles that wonder when the housing market will return to “normal”. I felt that Irvine was pretty affordable in the 1996-2000 time period. Then I thought that prices had pretty much peaked in 2000..not knowing about the loan shenanigans that were around the corner, and that interest rates would go way down over the next 10 years.
So, if we return to *my* vision of normal, and interest rates return to 8% or so over the next few years, and crazy derivatives and loan standards don’t make a comeback, “normal” should be around $150 (using your #), give or take household income change. I think that housing is a function of household income, not CPI. And household income hasn’t been doing well lately.
So our financial markets were ‘normal’ from 1996 to 2000? Aren’t there a lot of Broadcom employees in Irvine? Any chance Broadcom stock gets back to $150?
One reason interest rates were at 8% in 2000 was because people thought it better to invest in Pets-dot-com, Lucent, or jd s uniphase than it was to invest in treasuries. Quick google shows an inflation adjusted bond fund at 7%/yr for the past 10 years, or doubling of their money.
It will take one of two things for mortgage rates to hit 8%: (1) a better investing option, which would mean less unemployment, rising stocks, and a healthy economy. Under those circumstances, most people could tolerate 8% rates. (2) inflation. In that case, prices would be rising due to inflation, which is ‘good’ for current owners, but not for potential owners. There is no magic to get back to 8% rates, and the economy will look differently than it does today to see them.
If by “baby boomers” you mean the Federal Reserve. It’s about to get much much worse…
“some one has to buy this hole for 300K”
No one has to buy. You can rent as long as renting is cheaper than buying (as it is in Irvine right now).
Of the housing blogs I read, this is the all around best one and the creator of this site is a hero for the public service he provides.
However, have to strongly disagree with any sentiment that uncle sam should be in the insurance business, or any business other than enforcing constitutional law, and defending us from foreign invasion.
IR [the commie socialist scumbag ;-). . . kidding] states that private companies will fill the gap if uncle sam does a bad job on insurance. Wrong! – private companies will be driven out of business or never exist in the first place and the taxpayer will be on the hook for the screw ups . . . and if it’s less expensive, it’s due to taxpayer subsidy. All of us should know by now that this is how uncle sam works.
I feel sorry for the suckers who pay 300K for an 864 sq ft apartment. Looks like rates dropped once again from yesterday. The Fed has themselves between a rock and a hard place for sure. All these recent buyers who bought at record low rates better hope and pray that they stay low for an “extended period of time.” All these low down buyers could be underwater 15% before they know what happened. The next few years will be real interesting to watch…
Housing Inventory Grows
http://blogs.wsj.com/developments/2010/08/06/up-up-and-away-housing-inventory-grows-in-western-markets/
I believe the **shadow** inventories are beginning to show up. A lot of homes are popping up for sale left and right in Northwood (Woodbury in particular).
Someone correct me if I’m wrong on this one.
This one’s severely overpriced compared to the entry-level, new construction at Stonegate East.
1,120 square feet with 1 bedroom, 1.5 baths and a 1-car garage for $348K
To clarify,
FHA’s current Up Front Mortgage Insurance Premium is 2.25% which is often financed. The monthly mortgage insurance is .55% of the loan amount / 12.
In September the UFMIP will be reduced from 2.25 to 1.25%. The Monthly Mortgage Insurance will be increased from .55 (minimum down) to .90.
This change is simply going to increase the income flow into FHA’s insurance pool over time. My guess is that HUD has recognized that appreciation potential is over. FHA Insurance used to be remove-able if you your Loan To Value hit 78%, and 5 years of payments are made. You could see FHA Insurance terminate if there was appreciation. If appreciation is not possible to help remove MMI, then why not collect it at a greater rate for the time period normal amortization takes to reach 78% LTV – roughly 10 years.
I can’t comprehend the logic behind this radical reduction in the UFMIP. They should have either retained the high UFMIP and the minimum down, or reduced the UFMIP and increased the minimum down payment to 5 percent. These changes would have done more to help HUD re-capitalize the FHA insurance pool along with providing relatively lower risk mortgages to start with.
Things will be different when I’m in charge.
My .02c
Soylent Green Is People.
The people that think it’s a bad idea to invest in LV real estate are only looking the shady aspects and reputation of the town.
How is it a bad idea as an all-cash investor to buy an asset that yields 6-8%? Especially in this BS economy.
Las Vegas is gonna be one of the first towns to see actual REAL housing appreciation due to the rent/own cost being so distorted. In fact, short of a complete economic (1930’s style) depression, LV is likely reaching the bottom of its cycle.
JMHO
IrvineRenter: “The advantage and value of assumability becomes greater the more interest rates go up. If five or ten years from now we are back at 9% interest rates, an assumable 4.5% interest rate will have significant value.”
As interest rates rise, house prices must fall.
4.5% -> 9.0% = -37%?
If so, 3.5%-down 30-year FHA loan may be deep underwater. No way to sell.
You should go back and read the post I linked to above. You can sell and underwater home if the mortgage is assumable.
Some strings will be attached to assumable payments:
– Broken balance sheet
– Smaller tax deductions (4.5% rate)
– No ability to refinance (no equity)
– Limited pool of buyers (no flexible payments allowed)
It looks bad if there are comparable homes listed for sale.
This is the first I’ve heard of this. This totally makes sense – Let’s keep the home buying market going.
Place bought to be demolished that makes that Portabello mansion look tasteful by comparison.
http://www.ajc.com/business/future-of-dean-gardens-585058.html
Pics of the Dean Gardens mansion
http://www.deangardens.com/home.htm
City of Irvine
Elected Officials and Management Employees
Salary and Benefits
http://www.cityofirvine.org/cityhall/citymanager/city_manager_city_council_executive_compensation/default.asp
So our financial markets were ‘normal’ from 1996 to 2000? Aren’t there a lot of Broadcom employees in Irvine? Any chance BRCM gets back to $150?
One reason interest rates were at 8% in 2000 was because people thought it better to invest in Pets.com, Lucent, or JDSU than it was to invest in treasuries. Quick google shows an inflation adjusted bond fund at 7%/yr for the past 10 years, or doubling of their money.
It will take one of two things for mortgage rates to hit 8%: (1) a better investing option, which would mean less unemployment, rising stocks, and a healthy economy. Under those circumstances, most people could tolerate 8% rates. (2) inflation. In that case, prices would be rising due to inflation, which is ‘good’ for current owners, but not for potential owners. There is no magic to get back to 8% rates, and the economy will look differently than it does today to see them.
What? Nobody has noticed this this condo is on a street named after the disgraceful Angelo Mozilo, former founder and CEO of Countrywide, AKA TANGELO Mozilo? You can only get the type of tan he has by golfing 6 days a week! And for all the golfing, he still got 127 million in compensation in 2007! Maybe he also got some of that for his “Friends of Angelo” subsidized loan program where he bribed senators and judges with easy approval, best rate loans.
What amazes me about all the HELOC abuse (whenever I think about it) is that it happened at a time when the economy was going along pretty well. I can understand HELOC abuse in times like we’re in now…where unemployment is high and people are really up against it financially, but the HELOC abuse Irvine Renter chronicles happened at a time when jobs were much easier to find than they are now. Well, who said these things were logical…
Irvinerenter, I would like to point to another possibility where I think you are getting it wrong on FHA revisions.
“FHA’s current Up Front Mortgage Insurance Premium is 2.25% which is often financed” This premium will do down to 1%, thereby allowing folks to pay down 3.5% downpayment and 1% upfront premium, total of 4.5% in lieu of 3.5% + 2.25% = 5.75% and no, FHA premium cannot be financed, hence now those who have even less cash would qualify and that added monthly premium is not much impact on monthly payments although it adds up though.
I am one such buyer who strongly favour getting FHA low downpayment loan and pay PMI and other costs as suppose to pay 20% down and lose my cash if shit hits the fan (which is highly likely). My theory is that we dont know how worse job market will get and if I lose my job, I will have my cash and I will squat on the home like others too if I lose my job. If economy improves in next 12 months, I would simply make bigger payments and bring up my payments so that I paid 20% of loan quickly and eliminate PMI then.
When we are so uncertain, it does not make sense to make big downpayments. Worry about next 2-years and not now.
Any thoughts?