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I recently took on a technical job in the capital markets division of one of the largest mortgage origination firms in the country. Needless to say, the position requires that I see a lot of the transaction data related to the mortgages we write, critical information such as the type of product, client, etc. Not long after being on the job I began to notice a lot of FHA product coming through our system. Curious as to whether my intuition was accurate, I ran some queries against a couple of our major data warehouses that are used in product reporting. It turned out that over 40% of our product in the last year has been FHA related (we're talking millions of transactions). I couldn't believe it. I can only imagine the kind of risk the federal government is assuming. I guess hard-lessons lead to soft-responses
When I went to work in the banking industry many years ago I was staggered by the forced unfair political cleanup of the S&L crisis and the people I worked with promised I would be more shocked by the mortgage guidelines being forced by the federal government.
Sure enough it looked like traditional sound underwriting standards were pushed out by the feds and replaced with affirmative action goals but the bankers said we will manage as we are selling the loans to the government and in the secondary market.
Like any unsound strategy the whole thing collapsed and I have no doubt we will repeat again in some variation created by government.
I recently took on a technical job in the capital markets division of one of the largest mortgage origination firms in the country. Needless to say, the position requires that I see a lot of the transaction data related to the mortgages we write, critical information such as the type of product, client, etc. Not long after being on the job I began to notice a lot of FHA product coming through our system. Curious as to whether my intuition was accurate, I ran some queries against a couple of our major data warehouses that are used in product reporting. It turned out that over 40% of our product in the last year has been FHA related (we're talking millions of transactions). I couldn't believe it. I can only imagine the kind of risk the federal government is assuming. I guess hard-lessons lead to soft-responses
Any time the general public can buy houses with less than 20% down and 30-year loans, it is risky for several years, if the value drops much they will be underwater.
20% down provides more of a cushion and 15-year loans accumulate an equity cushion much more quickly since the principal repayment is much larger than for a 30-year.
Note that America is very unusual in offering 30-year fixed rate mortgages at all. No such thing exists in most of the rest of the world, Canada included. This makes it a classic example of government interference in the markets, since they likely wouldn't exist here either without government backing, or the Fed artificially suppressing long term interest rates. If rates went up to their normal levels for market risk without government backing, there wouldn't be enough demand for 30-year loans either by borrowers or investors to make it worthwhile, so the US wouldn't have them, making America re-join the rest of the world.
I recently took on a technical job in the capital markets division of one of the largest mortgage origination firms in the country. Needless to say, the position requires that I see a lot of the transaction data related to the mortgages we write, critical information such as the type of product, client, etc. Not long after being on the job I began to notice a lot of FHA product coming through our system. Curious as to whether my intuition was accurate, I ran some queries against a couple of our major data warehouses that are used in product reporting. It turned out that over 40% of our product in the last year has been FHA related (we're talking millions of transactions). I couldn't believe it. I can only imagine the kind of risk the federal government is assuming. I guess hard-lessons lead to soft-responses
Am I understanding correctly that you are talking straight mortgages, and not derivative products such as CMO's (collateralized mortgage obligations) ??
The real problem in the real estate bubble and collapse in the 2000's was the frenzy regarding CMO's, which allowed a lender to easily pass off all risk to someone else. This created a kind of Ponzi scheme, with the extra dimension of a game of hot potato. Add to that the fraudulent AAA ratings that Moodys, Fitch, and Standard & Poors gave in return for a tripling of their fees, and the net result was disaster.
I may be wrong, and please, everyone, feel free to correct me, but I believe the FHA has certain standards for an FHA loan and it has nothing to do with CMO's.
My instinct is to be less worried about what you have found. The current real estate market is such that only those with decent credit can get loans. The flippers, who deal in cash, seem to be driving a significant percentage of the market. Either way, less risk.
Any time the general public can buy houses with less than 20% down and 30-year loans, it is risky for several years, if the value drops much they will be underwater.
20% down provides more of a cushion and 15-year loans accumulate an equity cushion much more quickly since the principal repayment is much larger than for a 30-year.
Note that America is very unusual in offering 30-year fixed rate mortgages at all. No such thing exists in most of the rest of the world, Canada included. This makes it a classic example of government interference in the markets, since they likely wouldn't exist here either without government backing, or the Fed artificially suppressing long term interest rates. If rates went up to their normal levels for market risk without government backing, there wouldn't be enough demand for 30-year loans either by borrowers or investors to make it worthwhile, so the US wouldn't have them, making America re-join the rest of the world.
Europeans are much more in favor or adjustable rate mortgages. Do you know the terms of most of their mortgages?
Europeans are much more in favor or adjustable rate mortgages. Do you know the terms of most of their mortgages?
Fixed rate mortgages on residential property is pretty much a US-only product. Thirty year loans are pretty rare too in the rest of the world.
The risks will always be related to debt/income ratios in markets where mortgages are the norm. If incomes fall and/or debt ratios become too high, mortgages fail. This is the normal relationship and were the first domino causing the 2008 financial panic. Bad economic conditions made incomes in aggregate fall and there was no cushion whatsoever on the debt/income ratios leading to the first round of defaults and devaluations. This pressured the banking system which created more income loss and a re-evaluation of what was an appropriate debt/income ratio causing a cascade of losses until the government stepped in and ended the cascade.
In a world where FHA dominates origination, the system is greatly cushioned. FHA fees have been going way up over the last few years. All loans with under 20% equity charge a pretty significant premium for mortgage insurance and now you essentially prepay it for the entire period its required, so if you later refi the loan FHA pockets the premium and has no risk. This is the real endgame with FHA loans. They originate and hold some risk, but have a building cushion of mortgage insurance which isn't tapped much in a time of rising home values. Eventually their terms become more onerous than the marketplace offers and private origination increases while FHA loses share. If because the environment becomes too volatile and the private market backs away from origination in the future, FHA will gain share and keep some stability to the market.
Now of course if the market has another cascade of losses and home values drop 40% or more the FHA is going to have issues, but the hope is that is a once in a 100 year scenario. In the business world, no business can operate efficiently if all it ever does is prepare for the worst case scenario.
As long as people can afford the payments they sign up for, I think we are OK.
In my area, which was a foreclosure hotspot, droves of people were taking loans with unaffordable terms. That was the problem.
Like the vast majority of people in my area, I found myself substantially upside down a few years ago. I seriously considered "walking away", but in the end, I chose to stay put and keep making my mortgage payments. Why? The payments are affordable, so why not?
I thought about FHA on my first house. The fees were rediculous and the GMI was also terrible. FHA didn't require much, but for standard PMI all that was required was 5 percent down. I ended up doing lender paid PMI with 5 percent down on a 30 year note. The 15 year note was something we weren't sure we could swing on a month to month basis. FHA was a good deal a few years ago. Not anymore for many buyers.
Fixed rate mortgages on residential property is pretty much a US-only product. Thirty year loans are pretty rare too in the rest of the world.
The risks will always be related to debt/income ratios in markets where mortgages are the norm. If incomes fall and/or debt ratios become too high, mortgages fail. This is the normal relationship and were the first domino causing the 2008 financial panic. Bad economic conditions made incomes in aggregate fall and there was no cushion whatsoever on the debt/income ratios leading to the first round of defaults and devaluations. This pressured the banking system which created more income loss and a re-evaluation of what was an appropriate debt/income ratio causing a cascade of losses until the government stepped in and ended the cascade.
In a world where FHA dominates origination, the system is greatly cushioned. FHA fees have been going way up over the last few years. All loans with under 20% equity charge a pretty significant premium for mortgage insurance and now you essentially prepay it for the entire period its required, so if you later refi the loan FHA pockets the premium and has no risk. This is the real endgame with FHA loans. They originate and hold some risk, but have a building cushion of mortgage insurance which isn't tapped much in a time of rising home values. Eventually their terms become more onerous than the marketplace offers and private origination increases while FHA loses share. If because the environment becomes too volatile and the private market backs away from origination in the future, FHA will gain share and keep some stability to the market.
Now of course if the market has another cascade of losses and home values drop 40% or more the FHA is going to have issues, but the hope is that is a once in a 100 year scenario. In the business world, no business can operate efficiently if all it ever does is prepare for the worst case scenario.
History indicates it's more of a "once every 30 years" scenario. Of course, in '82 it was because the Fed ran mortgage rates to 18% and no one could afford the payments. If you were trying to sell, you were out of luck. It took a long time for prices to recover and rates to come down. I bought a place in '86 for 45% of the last sale price, and the best rate I could get was 10%. By '94, when I moved again, mortgage rates were down to 8.5% and prices still hadn't fully recovered.
The big banking crisis back then was that banks had a lot of low interest mortgages outstanding, and weren't making any money. We also had to bail out the (recently deregulated) Savings and Loan industry. It was quite a scandal at the time, with S&L board members and execs lining their pockets at taxpayer expense. Sound familiar?
It only takes one generation for people to forget and start doing stupid stuff again. Look for the next big housing disaster sometime around 2035 or 2040.
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