Irvine Housing Blog

Exactly. If the stated goal is to modify to keep people in their homes permanently, the govt programs and mods are mostly a failure. However, if the goal were to “amend, pretend, extend” as Calculated Risk would say, then the programs are a success, allowing banks to pretend their loans are still good and pretend the bank is still solvent long enough for the govt to funnel money into the bank though all kinds of arcane means and long enough for money printing to cause enough secret inflation to make all the underwater borrowers above water again.

You mean the less than 1.6% of Irvine loans that are FHA financed?  “Most” must be a small number to you.

Also, the FHA MIP lasts for the first five years in a 30Y mortgage.  i.e. If your loan principal were to decrease to below 78% of the home’s value in year three, you cannot get an appraisal and have FHA drop the MIP.  FHA is trying to earn some money for the risk they’re taking.

Also, if you can swing a 15Y mortgage, the FHA MIP would be 25 bps if the LTV is > 90% and there’s no MIP if the LTV is <= 90%.

Mattman,
You are correct in regards to the costs associated with FHA financing. However, like all things in life there is a risk reward tradeoff and FHA does a decent job balancing the two. It’s important to remember that the core function of FHA financing is to allow qualified borrower to obtain financing needed to obtain homeownership when that individual would normally not qualify under conventional guidelines. 
I would like to begin by agreeing with you in regards to putting down 20% or more to avoid costs but I hope this shows the true cost of FHA vs. conventional.
If not able to put down 20%, FHA is by far the best alternative available. Anyone who can afford to put 20% normally would not consider FHA financing unless the opportunity cost of the additional down payment would out weight the increase in monthly payment or the individual would like to use as much leverage possible.
FHA vs. Conventional (purchase transaction, SFR, $500,000 purchase price, 720 FICO, sufficient income) 
Option 1: $500,000 purchase price at 80% loan to value (20% down) would give you a loan amount of $400,000. You could expect to receive a rate of 4.75% giving you a principle and interest payment of $2,086.58 (I am using par pricing and excluding any lender fees in order to simplify this comparison). If you took out the additional $82,500 from a 2.42% bond (www.bankrate.com/cd.aspx) you would have lost an additional 166.37 per month making your total payment $2,252.95
Option 2: Let assume we are going to do a conventional first for 80% at $400,000 and were able to find a lender to do a second mortgage up to 96.5% - I couldn’t find anyone anywhere to do this. I did find that Wells Fargo can do a HELOC second up to 80% loan to value at 7.865%. Let’s just use that number even though it would not be possible as out second loan rate. A first of $400,000 at 4.75% would give you a payment of $2,086.58 plus an interest only second of $82,500 at 7.865% would give you a payment of $540.71 giving you a total payment of $2,627.29 - however, you will find difficulty obtaining this type of financing.
Option 3: Doing a conventional first of $475,000 at 90% Loan to value. Your rate would be 5% which would give you a monthly payment of $2,415.69 and your monthly mortgage insurance premium would be $356.25 per month (720 fico minimum to qualify for private MI up to 90%ltv – www.mgic.com) Your total payment would be $2,771.94 plus the additional $65.54 you would have lost from your bond income by needing to put 10% down instead of only 3.5% brings your total to $2,837.48.
Option 4: Doing an FHA first of $482,500 at 4.625% with a payment of $2,481 plus your monthly mortgage insurance premium of $361.87 (.9% of loan amount – April 18th this will change to 1.15%) will give you a total payment of $2,842.87. You will have to pay an upfront mortgage insurance premium of 1% but that can be negotiated so that the seller can pay it as well as up to 6% of your closing costs.
Although FHA financing seems expensive there is really no better alternative which is why it has grown in popularity in the last few years. Other factors which have made FHA financing more attractive are that the credit qualifying criteria for a borrower is not as strict as conventional financing. Also, a borrower using FHA financing allows the 3.5% down payment to come from a qualified family member which if you can negotiate having the seller contribute towards your closing costs you can purchase a home with $0 down. The monthly mortgage insurance premium will expire either after 5 years or if you reach a loan to value of 78% or less.
FHA also allows borrowers with “credit problems” to still qualify since not only are the guidelines not as strict but the underwriters that review the loans use a common sense approach to underwriting each and every file. Other reasons why FHA financing is attractive is because current FHA borrowers may streamline their loan into a new lower rate loan with no additional closing costs added to the loans. Also qualifying for a streamline is considerably easier than refinancing, especially in the value of the property has come down and you would like to take advantage of the new lower rates.  As long as you have had the current loan for 6 months and are current on the mortgage you can do the streamline refinance as many times you wish. Something that may really benefit current borrowers is the assume ability of FHA loans,  if you purchase at today’s rates and in the future if rates increase, the buyer, subject to qualifying, can purchase your home according to the terms of your current loan.
Disclosure: Of all the purchase money transactions we did last year 47% were FHA, 51% were conventional and 2% were VA. Rates were based on the optima blue pricing engine on 4/1/11 and were quoted at par, meaning no origination fees needed to obtain that rate.

“If his payments are lower now than the first few years of the loan, he wasn’t paying the minimum like many oarm borrowers.”

Not necessarily. What some people don’t realize is the interest rate on an OARM isn’t directly tied to mortgage rates, it’s tied to different indexes like the LIBOR, CODI or COSI (COSI was very popular in Glendale/World’s/Wacho/Wells loans). Back in mid 2000s, that rate was 3 to 4.5 percent and usually teasers for the 1st year were 2-3 points below the prevailing fixed rate so that by the 3rd year you were on par (that usually coincided with your index). So if we assume that his teaser payments were 4%/5%/6% for the first 3 years (6-7% was the 30-year fixed at that time), that’s probably an index of 2 to 3 on top of his margin rate.

What is the COSI now? 2.22 percent. It’s been there since the start of 2010. So let’s say his index was 2.5%, he’s paying 4.72% which is lower than what his year 2 and 3 payments were.

Now again… I’m not saying that everyone’s case is like this and that OARMs are not a problem… I’m just theorizing that the record low indexes now (not just mortgage rates) are mitigating the payment shock that was supposed to happen so the damage predicted by the explosion of OARMs may not be as bad.