Is the rug going to be pulled out?

Since the initial decline of the housing market and the associated collapse of the banking and mortgage industry, FHA loans have taken over a majority of the lending being done here.

I have often thought that these FHA loans were going to be our next "wave of defaulting loans" for the following reasons: Most FHA loans made here are with only a 3.5% down payment and allow the seller to contribute up to 6% towards the buyers closing costs. And generally, a lot of the buyers go "FHA" for 2 main reasons...they don't have much cash AND they have lower credit scores than required by conventional lenders.

 In essence, all of these newly issued FHA loans are the same "no money down" loans that are currently contributing to the explosion in defaults. It has been shown that homeowners are more likely to default when there is no equity in the home....this seem obvious.

 Well, in a declining market, like we are in, it won't take long for all of the FHA loans made in the previous 12 months to be "upside-down". Combine "upside-down", with lower credit scores and what do you get? The recipe for more defaults!

 I believe that the above reasoning has prompted the following:

The FHA Taxpayer Protection Act of 2009 — HR 3706 , introduced in Congress Monday would increase the minimum down payment for Federal Housing Administration (FHA)-insured mortgages from 3.5% to 5% and would also prohibit financing initial service charges, appraisals, inspections, or other fees or closing costs with any part of an FHA mortgage. (seller-paid closing costs)

 The bill’s author, Rep. Scott Garrett (R-NJ), said the current policy of allowing closing costs to be rolled into the mortgage effectively reduces FHA down payments to as low as 2.5% (and sometimes greater than 100% financing) because borrowers don’t have to have as much (any) cash on hand at closing.
 “As we have learned repeatedly throughout the mortgage crisis, the amount of equity a homeowner has in their home directly correlates to the credit risk associated to their mortgage.”

 The bill also calls for an examination of the housing market’s dependence on the fund (FHA) since the mortgage crisis began.

 The inspector general for HUD, Kenneth Donohue, also appeared before the House subcommittee calling for more resources. To illustrate the explosion of FHA’s presence in the market since the development of the near-third statistic often exchanged by industry players and media outlets, Donohue said data show the FHA’s endorsements (or guarantees of mortgages) rose from 24% of the single-family market in the first quarter of 2008, to 63% of the market in Q109, including home sales and refinance.

 So, if the above bill does pass and the FHA lending criteria "tighten", then I believe that here, locally, the housing market will suffer. When you make it more difficult to obtain the loan that the majority of our buyers are utilizing...there is only 1 conclusion. Then, combine this change with the expiration of the 1st time homebuyer tax credit AND a potential rise in mortgage interest rates! Not good for us homeowners here in South Florida.

Shoot me an email and let me know which way you see the market heading.