First bailout for FHA thanks to settlement

Reports indicated that hidden deep inside the 2013 federal budget showed the Federal Housing Administration (FHA) was asking for a cash bailout of approximately $688 million for the first time its 78-year history. Now conveniently it finds itself a bunch of money from the $25 billion attorneys general settlement with the nation’s five largest mortgage servicers. The FHA will now net a cool $1 billion infusion into its Mutual Mortgage Insurance fund (MMI). Add to that increased insurance premiums and the fact that the FHA’s 2010/2011 book of business are performing far better than previous books, and officials at FHA say the previous OMB estimate is, “obsolete.”

The budget calls for a 25 basis point increase in insurance premiums for higher priced loans (over $625,500). The current loan limit for FHA is far higher than it has been historically, $729,750, thanks to Congressional action to keep mortgage capital flowing. HUD Secretary Shaun Donovan said in a conference call today with reporters that FHA premiums, which were raised ten basis points recently to pay for the extension of the payroll tax cut, will be raised even beyond the budget proposal in order to strengthen the FHA fund, “as well as to insure that private capital continues to return to the housing market,” Donovan added.

In addition to the existing Attorney Generals settlement, there could be additional similar settlements with other servicers that could net the FHA even more cash. Had the settlement not happened, or happened on a smaller scale, FHA would arguably have been deeper in a financial hole.

BULK SALE PROGRAM

Fannie Mae and Freddie Mac, the mortgage giants under government conservatorship, together owned 182,212 foreclosed properties as of the end of September. While they aggressively market and sell these homes to investors and owner-occupants alike, the numbers are still too high; these numbers could go far higher, as foreclosures previously stalled by paperwork issues come back into process. That’s why the federal regulator overseeing the two is launching a bulk sale program, offering investors the chance to buy foreclosed properties at a discount, as long as those investors turn the properties into viable rentals for a specified number of years.

“This rental period could provide relief for local housing markets that continue to be depressed by the volume of foreclosed properties, and provide additional rental options to certain markets,” according to a release from the regulator, the Federal Housing Finance Agency (FHFA). REALLY? So instead of letting a cycle run its course, we again have to deal with the involvement of the federal government.

The FHFA just started the pre-qualification process. Investors must prove they have “(a) the financial wherewithal to acquire the assets; (b) sufficient experience and knowledge in financial and business matters to analyze and bear the risks of the investment opportunity; and (c) agreement to keep certain information about the REO [Real Estate Owned, i.e. bank owned] and related matters confidential.” That last part is pretty darn sketchy if you ask me. Again “we the people” get the actual data hidden from us.

It has been said by some involved that “Giving investors the opportunity to help clear the massive amount of distress in the housing market is crucial”. “The inventory of foreclosed properties is large, getting larger, and making it impossible for the overall market to achieve price stability”. Witness a report today from CoreLogic which shows that home prices in December fell 4.7 percent year-over-year including sales of distressed properties. Excluding those properties, home prices fell less than one percent.

Some, however, poo poo the program:

“People are brainwashed to think foreclosures are a bad thing for the housing market. Perhaps four years ago when a million loans all went into default and Foreclosure at the same time but not today. Today, 1st timers and investors — with an insatiable appetite for foreclosures, REO resales, and short sales — are the bedrock of this housing market.” – Mark Hanson, a Mortgage Analyst said.

“Foreclosed homes are already meeting strong demand from investors when they come to market. We think these buyers are willing to pay a relatively full price, as they know the specific locations, and a large number of buyers have the ability to bid on the individual homes (doesn’t require significant capital)… Additionally, it will be difficult/expensive for investors to scale up operations given the broad geographic dispersion of properties vs. more traditional rental units, potentially limiting participation.” – Dan Oppenheim, Credit-Suisse. Oppenheim also asks a valid question as to why the government would offer discounts to large investors buying in bulk, but not to individual investors buying perhaps a single property. There are plenty of Americans out there salivating over incredibly low-priced homes; rental income could be as much of a boon to them as perhaps a tax cut or a refinance.

It was interesting yesterday, during his speech touting a proposed new government mortgage refinance program, President Obama, caught up in the moment, exclaimed, “No more renting!” Putting aside the public relations blunder that was, given the fact that the FHFA had announced its REO to rent program not two hours before, it just drove home the conflict our government has between what it thinks Americans want to hear and what our economic reality dictates.

A few simple facts: There is not enough buyer demand to meet the number of homes for sale. A huge number of the homes for sale are empty, foreclosed properties. Too many Americans either cannot afford to buy a home or do not have the credit necessary to finance a home. Too many Americans cannot afford to sell their current homes in order to move or step up to a larger home. Rental demand is therefore strong and getting stronger.

While homeownership may be a tenet of the “American Dream,” renting is today’s actuality for a growing number of Americans. Whether it is large bulk investor program, or single investor incentive adding to rental supply while clearing the market of foreclosed properties, is a win. No doubt all these huge bailouts and involvement from our government will certainly change the landscape some. It appears that the firms with the money will again benefit as they swoop in with our governments approval (and help) buying low and selling high and lining their pockets with profits. The Occupy movement has more ammunition every day!

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