Thursday, November 12, 2009

FHA on DAPs: "Too many homeowners not equipped for home ownership"

by Bill McBride on 11/12/2009 03:11:00 PM

The FHA commented on the damage caused by the Downpayment Assistance Programs (DAPs) today. These DAPs circumvented the FHA down payment requirements by having the seller funnel the "down payment" to the buyer through a "charity" (for a small fee of course). The FHA attempted to stop this practice, but thanks to Congress, the DAPs led to billions of losses:

FHA was also adversely selected from 2000 through 2008 because it was the only guarantor willing to accept loans using seller-funded downpayments. Such downpayments were channeled through nonprofit organizations in order to meet FHA requirements on direct sources of funds. Those facilities created too many homeowners in the FHA portfolio that were not equipped for the financial responsibilities of home ownership. Indeed, the FY 2009 MMI Fund actuarial study for single-family loans notes that, if FHA had not insured any loans with seller-funded downpayment assistance, the net capital ratio today would still be above the statutory required two percent. FHA’s estimated economic net worth would be $10.4 billion higher today were it not for those loans. ... Their claim rates have consistently been between 2.5 and three times those of other FHA-insured home purchase loans.
emphasis added
This is still important today. The DAPs have been banned, but the first-time home buyer tax credit has probably created another group of "homeowners not equipped for the financial responsibilities of home ownership". Oh well ...

And some FHA stats ...
  • "86 percent of homebuyers relying upon FHA mortgage insurance in FY 2009 had downpayments of less than five percent."
  • "79 percent of FHA’s purchase-loan borrowers were first-time homebuyers."

    FHA Originations Click on graph for larger image in new window.

    This graph shows the recent boom in FHA originations. The MBA estimates that there will be about $2 trillion in orginations this year, so the FHA insured loans were probably just under 20% of originations.

    The second graph shows delinquencies by year.

    FHA Delinquencies Overall 17.71% of FHA insured loans are delinquent, and 8.52% seriously delinquent. Note: Seriously delinquent "Includes all loans 90-days past due plus all in-bankruptcy and in-foreclosure cases."

    The 2009 vintage is just getting started, but the FHA has tightened standards (higher FICO scores), and DAPs were banned at the end of 2008 - and that will help. Also the stabilization in house prices is helping with fewer delinquencies.

    However many of these recent homebuyers probably aren't ready to be homeowners, and the delinquency rate will probably rise sharply - especially if house prices start falling again.