As recently noted in this column, FHA is a mess. The Federal Housing Authority has been backing loans like a Madoff, and their scrutiny of borrowers has been just as good. With a wink-wink, nod-nod, FHA has come dangerously close to disaster, with significant proportions of its portfolio making only one payment before becoming delinquent. Now that’s all about to change. The question is: Will REALTORS be ready?
When you’ve spent almost a year feeding on free financing, it’s hard to suddenly stop and know what to do with buyers. That’s the challenge facing real estate professionals. Not only is there a looming deadline with the government will turn off taxpayer subsidized down-payment assistance, um, the tax credits for buyers. Today FHA announced it’s going to change downpayment requirements, raise the insurance premium for backing risky borrowers, and cap the amount of cash sellers can contribute to closing costs.
In other words, FHA is going to cause the housing market to stall.
There are many reasons this action is likely to stall the housing market, even with a few more months of tax credit availability. Some examples include:
- The ability of borrowers and real estate agents to find acceptable substitute lenders will decrease. Under the new rules, borrowers with credit scores lower than 580 will need a 10% downpayment for FHA backing. This is not only nearly triple the historical amounts borrowers needed for FHA loans, but it’s a double-whammy because the increased amount will hit consumers with the lowest qualifications.
- The tax credits value will fall. Even if most borrowers can still get the 3.5% downpayment deal, insurance fees from FHA will rise. While FHA states less than 1% of its borrowers had low enough scores to warrant the higher 10% downpayment in the future, even traditional borrowers were using FHA as a simple financial cheat. They could put $7000 down on a $200,000 home and get almost all of it back in the tax credit. That won’t work for anyone needing 10% down. And everyone is going to get hit with an increase in insurance fees, up from 1.75% to 2.25% across the boards. So monthly payments will hurt more. Borrowers will pause. The sidelines are going to swell with cautious buyers once again. Even if it’s affordable, it will be a psychological stall in the minds of consumers.
- Capping seller contributions will cause property prices to plunge. While seller contributions were another form of “wink-wink” cheat that propped up prices artificially, the new limits on seller funds at closing will cause buyers to demand lower actual prices. As prices fall again, lenders will move even farther from the real estate market. The falling asset value of houses – needed to attract buyers off the sidelines – will cause lending will stall. And appraisers – already burned once by the market – will be certain to under-estimate in a falling market.
- Real estate agents haven’t been practicing how to find qualified buyers or quality lenders for more than a year. With nearly-nil FHA downpayments and Federal reimbursements at tax time, it’s been easy for agents to find buyers “in the margin” who can be enticed to move – even in a declining market. Last year’s estimated 350,000 extra transactions were essentially”no-money-down” stimulated with other people’s money as downpayments. If banks remain uninterested real estate risk (with easier profits made borrowing from the Fed discount window and investing in stocks) REALTORS may find themselves in a crunch for both good-risk borrowers and willing-to-risk lenders.
The bottom line is simple: FHA is increasing the likelihood that we’ll have a double-dip recession – at least in housing – if not broadly across the economy. Whatever you thought of the initial use of taxpayer funds for housing downpayments, FHA now admits it can not continue backing 25% or more of the riskiest mortgages in the market. The country’s mood for more bailout dollars has soured, so even Fannie and Freddie may hit a wall. And while the Federal Reserve continues to make it more attractive to play stocks rather than make risky loans on declining commodities called houses, we may not have to wait for the tax credits to expire. When 1 in 4 borrowers only came off the sidelines last year because of some sort of subsidy, suddenly charging sensible lending and insurance rates is a sure-fire formula for stalling any housing recovery this year.
You can’t turn back the clock; better if FHA had never grown involvement in the first place, but that’s water under the bridge. Now they are trying to wean the consumer off the dole. And that means stalling the market at the worst possible time. It’s going to get tough for buyers and sellers – and that means tough for REALTORS. Most REALTORS are independent contractors. They won’t even be able to claim unemployment benefits when the market stalls. Let’s hope they saved enough from their tax-credit deals in the last year to make it through.