Let me take you back to a time... a simpler, gentler era known as 2006. Money was easy, banks were giddy with their chance to throw dollars in every direction.
Let me take you forward 3 years. Replace the words 2006 with 2009, and banks with US taxpayer. We not only have not only forgotten the lessons of 20, 50, 80 years ago. We've forgotten the lessons of 1 year ago. But not to worry, I'm sure it will work out better this time around. I just want you to remember these people when you are asked to pony up taxdollars to fund FHA (although it won't be a bailout since they can borrow money directly from the US Treasury Dept without asking Congress) - the folks who will say they were duped, they thought it was the bottom, they never expected prices to drop again, that it was the government's fault they were offered this type of loan. This is whose money is being transferred to.
And remember these stories as you sit in awe at the housing rebound statistics we are hearing about aka green shoots.
Via NY Times:
- In January, Mike Rowland was so broke that he had to raid his retirement savings to move here (San Fransciso) from Boston. A week ago, he and a couple of buddies bought a two-unit apartment building for nearly a million dollars. They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary.
We've had a lot of candidates for quote of the year lately, here is another fun one:
- “It was kind of crazy we could get this big a loan,” said Mr. Rowland, 27. “If a government official came out here, I would slap him a high-five.”
Oh yeah baby! Money is free and comes from the trees! Boo yah! I am so stoked I did not have to bother with 1 economics class in high school, so I can live in the Matrix ....with no qualms! I was told to just show up at the office at the required time and a nearly million dollar loan was mine!
- ....second partner, Michael Bedar, 31. “Then we read about the F.H.A. I had never heard of it before, and couldn’t quite believe it. But it was the answer to our problems.”
Government largesse is indeed the solution to all our problems Mr. Bedar.
- In its efforts to prop up a shattered housing market, the government is greatly extending its traditional support of real estate, including guaranteeing the mortgages of middle-class and even upper-class buyers against default.
- In 2007, the government did not insure a single mortgage in this city, one of the most expensive in the country. Buyers here, as well as in Manhattan, Santa Monica and every other wealthy area, were presumed to be able to handle the steep prices and correspondingly hefty down payments on their own. Now the government is guaranteeing an average of six mortgages a week here. Real estate agents say the insurance is such a good deal that there will soon be many more.
- 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.
- For decades, most F.H.A. loans were in low-cost states like Texas and Michigan. Under the agency’s loan limits, houses along the coasts were usually too expensive to qualify. In 2007, fewer than 4,400 F.H.A. loans were made in California, according to the research firm MDA DataQuick, and none were in San Francisco.
- The Economic Stimulus Act of 2008 helped change that by temporarily doubling the maximum loan the F.H.A. insured, to $729,750. A two-unit property like the one bought by Mr. Rowland and his friends can be insured for up to $934,200. (temporary my foot)
- At Guarantee Mortgage Corporation, which has 150 mortgage brokers in the Bay Area, Seattle and Portland, Ore., F.H.A. loans 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 F.H.A. (wait, I thought it was temporary? now you are planning to funnel 25% of your mortgages through the agency that caters to at risk, low income borrowers?) Mr. Rowland and his friends, simply do not have the money required by private lenders — which would have been nearly $200,000, in their case.
And as with every government handout, the drug addict becomes more in need of said drugs. Taking away those drugs becomes ever much more difficult.
- Policy changes like the shift in insurance, while often introduced on a temporary basis, are becoming so popular that they could prove difficult to undo. With government finances already under great strain, the policy expansions are creating new risks for American taxpayers. (that's ok, I'll just pass it off for my grandchildren to pay, no skin off my nose! Someone please send me a government official to high 5!)
- The Internal Revenue Service is giving tax rebates to first-time buyers, and soon to move-up buyers, in a program beset by accusations of fraud. [Oct 22, 2009: First Time Homebuyer Fraud Called Disturbing] And the government agency that issues mortgage insurance, the Federal Housing Administration, is underwriting loans at quadruple the rate of three years ago even as its reserves to cover defaults are dwindling. On Thursday, the Mortgage Bankers Association said more than one in six F.H.A. borrowers was behind on payments. (green shoots!)
- “If one of these higher-limit loans fail, that’s equivalent to two or three cheaper loans,” Mr. Donohue said. “You have to ask yourself, was the F.H.A. ever intended to address these markets?” (no, it was not. But let's not worry about details like that)
- He sees another risk: larger loans will be a greater draw for those who want to commit fraud. That would exacerbate a problem already besetting the agency.
- Even some San Francisco agents who are doing F.H.A. deals worry about the long-term consequences. Real estate commissions are 6 percent. If the value of a property were to hold steady, a seller who put down the F.H.A. minimum would suffer a loss after fees.
Hey as long as the stock market surges on better than expected housing data it's all bridge under the water to me. I win in my stocks, my future grandchildren pay the bill, people who put almost nothing down on a million dollar home get to show off to friend, then will live there without making a payment for 2 years in 2012-2013 as we keep foreclosures off the market (more green shoots). I believe this is called a win, win win.
2006? or 2009? The dream never ends with easy money - the quotes all sound so familiar. Mr. Bedar, Mr. Rowland and the third partner in their property, Jordan Kurland, are all in the technology field, but their dreams of wealth do not feature stock options.
- “We’re banking on real estate,” said Mr. Kurland, 24. “Everyone expects prices to keep going up.”
It can only be months before Flip That House makes it back to HGTV's normal programming. Can we rename it Flip that Taxpayer Sponsored House? Thanks.
- Warning: [May 6, 2009: FHA - The Next Housing Bust]
- Warning: [May 8, 2009: Minyanville - Subprime Lending is Back with a Vengeance]
- Warning: [May 13, 2009: Tax Credit as Mortgage Down Payment Now Official Federal Government Policy]
- Warning: [Jul 6, 2009: WSJ - No Money Down or Negative Equity Top Source of Foreclosures]
- Warning: [Aug 12, 2009: WSJ - The Next Fannie Mae - FHA/Ginnie Mae]
- Warning: [Aug 14, 2009: Ginnie Mae CEO Resigns After 1 Year on the Job]
- Warning [Sep 18, 2009: Washington Post - FHA's Cash Reserves Will Drop Below Requirement]
- Warning [Oct 14, 2009: NYT - FHA Problems Raising Concerns of Policy Makers]
- Warning [Nov 18, 2009: Toll Brothers CEO: Yesterday's Subprime is Today's FHA]