Setting Up the Next Leg Down in Housing
by ilene - September 9th, 2009 4:20 pm
Setting Up the Next Leg Down in Housing
Courtesy of Charles Hugh Smith of Of Two Minds
Loose lending standards in government-backed mortgages is setting up the next wave of defaults and sharp declines in housing prices.
Beneath the hype that housing has bottomed is an ugly little scenario: lending standards are still loose and the low-down payment, high-risk loans being guaranteed by government agencies are setting up the next giant wave of defaults and foreclosures.
You might have thought that the near-demise of risky-mortgage mills Fannie Mae and Freddie Mac would have cooled the supply of highly leveraged government-guaranteed mortgages--but you’d be wrong, for the Feds have compensated for the implosion of the Fannie/Freddie housing-bubble machines by ramping up their other two mortgage mills: FHA and Ginnie Mae.
These GSEs (government sponsored enterprises) have been around for decades, and have been generally successful due to tightly controlled lending standards.
But the order "save the housing market at all costs!" has been passed down, and the spigots of easy mortgage money have opened. Where FHA only underwrote 3% of the mortgages originated in 2006, now it guarantees about 25%. Between FHA and its VA mortgage sibling, these two GSEs now back fully 40% of all mortgages.
Down payments are as low as 3.5%, and so a first-time buyer making use of his/her $8,000 tax credit could essentially buy a $225,000 house with virtually no money down.
This is moral hazard writ large. Let’s see, the mortgage originator can’t lose because the FHA or Ginnie Mae assumes the risk of default, and the borrower can’t lose more than the few hundred bucks he/she "invested" in closing costs.
In other words, the Federal government has attempted to keep the housing market afloat by ramping up its remaining mortgage mills to fill the easy-money mortgage gap left by the insolvent Freddie and Fannie.
The only problem with this blatant pumping is that a staggering number of these wonderful FHA and Ginnie Mae mortgages are in default and thus doomed to enter the foreclosure pipeline.
Here is a report on the looming FHA fiasco from the Wall Street Journal:
Loan Losses Spark Concern Over FHA:
In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside