Matthew Ferrara, Philosopher
 

Reality Check for REALTORS and FHA

At the start of 2010, REALTORS need more from their news sources than footsie interviews with policy makers. In the January edition of REALTOR Magazine, another opportunity to set the record straight and get critical insights for its members about FHA’s role in the marketplace was wasted. Here’s a short list of alternate questions REALTORS need to ask policy officials soon.

In classic “let’s all get along” style, the National Association of REALTORS’ Magazine sat down with FHA Commissioner David Stevens to discuss how, as they headlined it, FHA was “prudently keeping the housing market alive.” Given that 2009 was an unmitigated disaster for real estate – both and agents – I’m wondering what FHA’s definition of a “dead market” would have to look like. Maybe we’ll learn that later this year?

You can read the article for yourself, so let me get to the point. NAR put the key question to Stevens: Will FHA need a bailout? Answer? We verify income. We document things. We have to keep 2% reserves by law, and we have $31 billion in capital. Today we’re fine; if a double-dip were to occur, we’d be in the same boat as the other big banks.

So, no answer.

REALTORS need better answers and guidance from policy officials. Not just a rehash of the same-old, same-old stuff. For example, where was the follow up with this question: Mr Stevens: Do you mean FHA won’t need a bailout the same way the other big banks did, even though they had lower exposure to risky loans than FHA does today and far more capital than your $31 billion?

The rest of the interview goes into mundania like loan limits and condo rules and paperwork. Wow, really good stuff that today’s REALTORS can thank their magazine for saving them the time to look up online.

REALTORS need to get policy officials pinned down on the future of the government actions in housing market. Otherwise,  REALTORS will cease to be the “voice” of real estate and end up the “mouthpiece” of it instead.

Off the top of my head, I think REALTORS need to  know the answer to these issues, so they can advise their customers – especially those who are contemplating using FHA finance. Here’s my imaginary interview with Mr. Stevens and FHA:

Mr. Stevens, in November the Wall Street Journal reported that your “capital-reserve fund fell to $3.6 billion as of Sept. 30, down 72% from a year earlier, leaving reserves at just 0.53% of the $685 billion in total loans insured by the FHA.” Can you tell us how this corresponds to your initial statement that you won’t need a bailout, and whether $30 billion in reserves would be enough money to make up for shortfalls?

Mr. Stevens, recent data released by HUD and FHA show that the rate of delinquencies for borrowers of FHA-backed mortgages was faster than at any time since 2004, with more than 15% of borrowers more than 60 days behind within the first year. Does it concern you that FHA-backed loans, even with all their documentation, may be a significantly riskier pool and defaults could destabilize the market further?

Mr. Stevens, we’re hearing a lot of news about borrowers who are simply walking away from their mortgages, even though they can make payments. These strategic defaults are occurring because owners have lost the equity in the home, some despite sizable down-payments. Do you think there’s an increased risk of that happening to FHA backed loans due to its low downpayment requirements – and if so, will your reserves cover that risk?

Mr. Stevens, we’ve heard that someone borrowing a $200,000 home with 3.5% down can receive that money back in the form of the home buyer tax credits. This means that many borrowers are essentially putting no-money down of their own. We’ve seen how this “no skin in the game” has a direct impact on consumers’ decisions to walk away from loans. Are you concerned about this fueling higher default rates in 2010?

Mr. Stevens, can you tell REALTORS how decreasing the amount of money a seller can contribute to closing costs is going to help move excess inventory from the marketplace? It would seem that lowering the contributed funds limit would slow the pace of home sales at a time when sellers may be using closing contributions as a competitive advantage to attract buyers.

Mr. Stevens, recently FHA announced plans to increase its credit score requirements for borrowers. We’re also hearing that credit card companies are cutting back their customers’ limits, which can immediately change their credit scores because their previous balances will now look like “higher” percentages of lower limits. Can you explain how FHA will account for what could be a broad “downgrading” of credit ranking due to changes in credit card policies and reporting?

Now, it seems to me that these are the kinds of things REALTORS need to know about FHA, its impact on their customers and their business plan for the future. What a shame that REALTOR Magazine wasted two pages to essentially a “press release” memo about FHA’s requirements, paperwork and role in the condo market. When so much public policy plays havoc with even the most local-of-agent’s business plan, it’s time for real estate leaders to ask the tough questions. If not for themselves, then hopefully for their customers.

  • “Given that 2010 was an unmitigated disaster for real estate” – should that read 2009?

  • “Given that 2010 was an unmitigated disaster for real estate” – should that read 2009?

  • Maribeth Reece

    This is the kind of exposure and deep down digging that needs to be done to uncover the truth from these institutions. So much broken…so much fixing needed! A long road ahead but on the right track.

  • Maribeth Reece

    This is the kind of exposure and deep down digging that needs to be done to uncover the truth from these institutions. So much broken…so much fixing needed! A long road ahead but on the right track.

  • Matthew Ferrara

    You’re right! thanks for catching that – let’s hope I wasn’t being clairvoyant!

  • Matthew Ferrara

    You’re right! thanks for catching that – let’s hope I wasn’t being clairvoyant!

  • Since having worked at an FHA approved direct lender, I can tell you that may times FHA’s underwriting would approve loans sub-prime wouldn’t even consider. Minimum down payment requirements, possible seller contributions and weak credit score requirements all leave the buyer with a great opportunity and FHA open to massive vulnerability. FHA will need a bailout as some point just like Fannie Mae and the rest. FHA’s guidelines are archaic and they need to stop the bleeding and revamp their underwriting requirements before you and me, the American tax payers suffer once again.

  • Since having worked at an FHA approved direct lender, I can tell you that may times FHA’s underwriting would approve loans sub-prime wouldn’t even consider. Minimum down payment requirements, possible seller contributions and weak credit score requirements all leave the buyer with a great opportunity and FHA open to massive vulnerability. FHA will need a bailout as some point just like Fannie Mae and the rest. FHA’s guidelines are archaic and they need to stop the bleeding and revamp their underwriting requirements before you and me, the American tax payers suffer once again.