There is another huge mortgage problem on the horizon, one that will even more directly burden the taxpayer than the current crisis: Federal Housing Administration (FHA) loans.
Let’s compare what happened during the mortgage crisis and what’s happening now.
Before, if you didn’t have money to make a down payment on your new Sheepshead Bay condo, no problem! Banks were giving out dollars like crazy and so the purchasers would take out 100 percent financing. Sometimes they would even walk away from their purchase with money in their hands after they purchased a unit for a few million.
We know how the story ends. It’s not a stretch to say the majority of people who purchased homes in the West Village, Park Slope, Sheepshead Bay, or anywhere in New York City with 100 percent financing have either foreclosed, are behind in their mortgage payments, or are having issues.
Now, if you don’t have money to make a down payment on your new Sheepshead Bay condo, no problem! Buyers are still being offered almost 100 percent loans. But this time it’s backed by the government through the FHA. So taxpayers are insuring housing loans, not private companies. Worse still, those loans are making up the fastest growing part of many lenders’ businesses.
During the bubble, FHA wasn’t a word that was used much. The FHA is basically a government agency that insures the loans private lenders give out. Here is an explanation from the New York Times:
F.H.A. insurance was created for minority and low-income families who could not come up with the traditional down payment of 20 percent required by private lenders. Buyers receive loans from government-approved lenders and are required to document their income and assets. They must pay a substantial insurance premium of 1.75 percent of the loan, but, in return, their down payment can be as low as 3.5 percent.
Because of caps on those loans the FHA wasn’t backing a lot of mortgages during the bubble (proportionate to the loans being taken out). So if a purchaser just bought a new condo in Sheepshead Bay, and he/she stopped paying, the bank was screwed, and maybe the underwriter of the loan, but not the government.
Fast forward to 2009. Tons of deals are being financed using FHA loans for individuals who have very little, if anything, to put down. Sound familiar? Well, for the privilege of receiving an FHA loan, which now ensures the private lender that Uncle Sam will step in if the purchaser of that condo defaults, all the purchaser has to do is put down 3.5 percent of the purchase price. And guess what? The credit requirements aren’t too stringent to get a loan. Lastly, a seller can actually give a concession to help the purchaser pay for the closing costs for his/her shiny new construction closing. Does any of this sound familiar?
Lets go a bit further. That same New York Times article states:
At Guarantee Mortgage Corporation, which has 150 mortgage brokers in the Bay Area, Seattle and Portland, Ore., FHAloans have grown to about 15 percent of its business, from less than 3 percent a few years ago.
“It sure has helped us put a lot of deals together,” said Guarantee’s chief sales officer, Bob Siefert. He predicts that a quarter of Guarantee’s deals will soon be guaranteed by the FHA.
Some F.H.A. borrowers here say they have the cash for a full down payment but would rather invest it in the stock market or use it for remodeling.
And even more troubling, courtesy of the LA Times:
This year alone the agency has backed nearly 2 million mortgages worth at least $328 billion. It insured 21.5% of all new mortgages last year, up from fewer than 6% in 2007.
Look, here is the issue for me. If you’re looking to buy a condo in Sheepshead Bay, and you have money for a down payment, that’s great. Good luck to you and I’d love to be your real estate attorney. And for the many people who are using FHA to buy homes they can afford all over Southern Brooklyn, or wherever, good luck to you, too. But I fear that FHA is being overused.
Really, the only distinction between this subprime mess and FHA is about 3.5 percent. In other words, where before you could buy a condo in Harlem and finance all of it, now, after everything that we’ve gone through in the real estate market, you could buy a condo, but only finance 97.5 percent!
It’s insanity to me. It’s almost like this is an artifical prop to the real estate market all over New York, let alone the country. Except the difference is that when people start defaulting on their purchase of a condo in Sheepshead Bay, the lender wont be on the hook, it will be every taxpayer.
And some more news: Representatives in Congress are looking at ways of increasing the amount an individual can borrow to qualify for an FHA loan. The limit on an FHA backed loan is now about $730,000. Which means the government is insuring every penny of that loan if the purchaser defaults.
This is downright scary in my opinion.
Daniel Gershburg Esq., is a real estate and bankruptcy attorney with offices in Sheepshead Bay and Manhattan. The practice was specifically set up to change the way people view attorneys, by incorporating radical ideas like calling people back quickly, returning emails, giving clients ’round the clock access to their cases and charging low fees. For more information please visit Brooklyn Real Estate Attorney Daniel Gershburg’s website.