The FHA is continuing to tighten it standards despite the government's desire to get more buyers to absorb the foreclosure problems facing the market.

Irvine Home Address … 66 GOLDEN GLEN St 4 Irvine, CA 92604

Resale Home Price …… $262,000

I respect your time

Don't mean to hit you on a work night

But what I gotta do girl (do girl)

Baby can't you bend them rules

Did I miss that cut off time

Used to be down did I drop the dime

Omarion — Cut Off Time

Why is the FHA tightening their standards at a time when we need every buyer we can find? With a sky-high delinquency rate, and with the taxpayer on the hook for the losses, the FHA didn't have much choice. People who fall below the cutoff line are the ones most likely to default on their mortgage. Expect standards to tighten further before this crisis is over.

Home Buying Gets Tougher as Lenders Restrict FHA Loans

By Jody Shenn and John Gittelsohn – Nov 17, 2010 11:41 AM PT

Home ownership may be falling out of reach for more Americans as lenders toughen their standards for Federal Housing Administration-insured loans beyond what the agency itself requires.

Mortgage lenders including Wells Fargo & Co. and Bank of America Corp., the two largest, have raised the minimum credit score on FHA-insured loans that they will buy to 640 from 620. About 6.3 million people fall within that range, according to FICO, which created the formula for the ratings.

With about 10 million distressed properties coming to market, this one small change just eliminated 6.3 million potential buyers. That can't be good for the housing market.

The higher hurdles for FHA loans, used in about a fifth of U.S. home purchases, add to challenges for a housing market already struggling with record-low sales and surging foreclosures. While lax lending fueled the bust that led the U.S. into recession, the new requirements will stifle the real estate recovery needed to revive the economy, said Ron Phipps, president of the National Association of Realtors.

“We’ve gone from silly to stupid,” Phipps, principal partner of Phipps Realty Inc., said in a telephone interview from his home in Warwick, Rhode Island. “People who should be getting credit can’t get it. To have a healthy real estate market, you need activity. You need transactions.”

The National Association of realtors has gone from silly to stupid.

In order to have stable transactions where borrowers actually get to keep their homes, we need to know they can really make the payments. There is no more Ponzi borrowing. Borrowers cannot borrow money to make payments. The really need to make money and have income.

FHA Rules

The FHA, which previously didn’t have minimums for FICO scores, began in October to require grades of at least 500, and more than 580 for loans with down payments of as little as 3.5 percent. Borrowers with scores between those levels must put 10 percent down. Several lenders moved minimums to about 620 at the start of 2009, the companies said then.

FICO scores range from 300 to 850. The grades are based on data such as whether borrowers have missed debt payments, balances on their credit cards relative to borrowing limits, and the length of their credit history, meaning consumers who’ve never fallen delinquent can have lower scores, according to the company’s website.

The 6.3 million people with grades between 620 and 640 equate to about 3.7 percent of U.S. consumers with credit information available, according to FICO, the Minneapolis-based company formally known as Fair Isaac Corp.

Requiring a 640 credit score excludes as much as about 15 percent of FHA borrowers, David Stevens, the agency’s commissioner, said in an interview yesterday. Minorities and borrowers in communities hardest hit by the recession are most likely to lose based on FICO scores, he said.

Playing the race card? Give me a break. The people most likely to have problems with their FICO scores are the millions of people who stopped making their mortgage payments.

Finding Better Way

“We are restricting opportunity and access for those who can least afford it,” Stevens said. “We need to find a better way to provide access to these families who are being cut out simply because lenders are putting arbitrary overlays on top of our requirements.”

Arbitrary? Obviously lenders are putting these restrictions on their loans becaue these people default at higher rates than others. There is nothing arbitrary about it. Think about it. Why would lenders put arbitrary standards in place that restricts their ability to profitably do business?

FHA insurance covers lenders or debt investors when borrowers default. One of every five U.S. home purchases relied on the loans in the fiscal year through July, the agency said in a report yesterday. They accounted for a third of purchases by first-time homebuyers in the year ended Sept. 30.

The FHA, the Department of Veteran Affairs and Fannie Mae and Freddie Mac, the companies taken over by the government in 2008, have been providing about 95 percent of new mortgage financing after falling home prices sparked retreats by banks and by investors in mortgage bonds without U.S.-backed guarantees, according to Inside Mortgage Finance newsletter. The S&P Case-Shiller Index of property values in 20 cities fell as much as 33 percent from its 2006 peak.

Now that the government is the market and taxpayers have to absorb future losses, I am relieved that lending standards are getting tighter.

Larger Role

“It’s absolutely clear that, today, FHA is playing a larger role than it should,” Stevens said during a conference call with reporters yesterday. “But it’s a counter-cyclical force providing liquidity in a market where private capital still is completely absent.”

I agree with him on this point. There is a viable place for the FHA. I would like to see the GSEs dismantled, but the FHA does serve a useful role in cleaning up after disasters like the Great Housing Bubble. Can you imagine what would have happened if the FHA were not around?

Mortgage companies are tightening FHA standards partly because of the higher costs they face in servicing delinquent loans, said Luke Hayden, president of the mortgage unit of Mount Laurel, New Jersey-based PHH Corp. By keeping defaults low, they can also boost the prices they fetch for bonds filled with the loans and thus offer lower rates, he said.

When FHA-backed loans go into default, the lender bears a greater share of the expenses than when the mortgage is backed by Fannie Mae and Freddie Mac, Hayden said. Lenders whose delinquency rates stray too far from averages can also face being cut off by the FHA or other sanctions from the agency, said David Lykken, president of Mortgage Banking Solutions, an Austin, Texas-based consulting firm.

Now we see why lenders are putting tighter standards in place.

Lender Buybacks

With Fannie Mae and Freddie Mac mortgages, lenders are forced to buy back bad mortgages that were improperly underwritten, which has also prompted them to adopt tougher guidelines for those loans.

More banks tightened standards on prime residential mortgages in three months ending Oct. 31 than loosened them, a switch from the prior period, a Federal Reserve survey found. …

‘Huge Effect’

“When the big companies change their standards and rules, it has a huge effect on the market,” said Bob Walters, chief economist at the Detroit-based company.

JPMorgan Chase & Co., the third-largest lender, had already been generally requiring credit scores of at least 640 on FHA loans before the tightening by competitors, said Tom Kelly, a spokesman for the New York-based company.

Matt Hackett, underwriting manager at New York-based Equity Now Inc., said higher requirements among buyers of its FHA loans cut off about 5 percent of his potential customers. A 640 score disqualifies about 15 percent of customers who were getting FHA loans through Chris Murphy, a loan originator at Main Street Home Loans LLC, an independent mortgage bank based in Alpharetta, Georgia.

“It’s bad from the originator’s standpoint because fewer people qualify,” Murphy said in a telephone interview from his office in Charlotte. “But it’s less likely they’re going to default and so, from the standpoint of the economy, it’s probably a good thing.”

Since we are all paying the bills as taxpayers, I agree that tightening standards are a good thing. In fact, there are only three groups that want to see standards loosen: (1) those who make money off the transactions regardless of the outcome, (2) those who want to sell property at inflated values, and (3) government officials who feel pressure to expand home ownership. I could add buyers who no longer qualify for loans to that list, but the desires of those unlikely to repay their debts doesn't count for much.

Mortgage Delinquencies

About 9.8 percent of U.S. home mortgages were delinquent at the end of the second quarter, with an additional 4.6 percent in the foreclosure process, according to the Mortgage Bankers Association. The Washington-based group releases figures through Sept. 30 tomorrow.

Nearly 10% of mortgage holders are not paying. That number is truly astounding.

FHA lending to the riskiest borrowers has declined in the past two years. Only 3.8 percent of FHA loans had scores below 620 or no score in the quarter ended Sept. 30, down from a peak of 50.4 percent in the period through Dec. 31, 2008, according to a Nov. 4 agency report to Congress. A score below 620 was typically considered subprime before the credit crisis, meaning the borrower had a bad or limited credit history.

More Than Expected

“Mortgage credit availability has tightened even more than we expected,” Morgan Stanley analysts Oliver Chang, Vishwanath Tirupattur and James Egan said today in a report.

At the same time, the recession and unemployment has spurred a decline in borrower credit scores, they said. There has been about a 23-point drop in FICO scores among current borrowers who took loans without government backing in 2006 and 2007, they said.

The U.S. home-ownership rate remained at a 10-year low of 66.9 percent in the quarter ended Sept. 30, in part because of rising foreclosures, the U.S. Census Bureau reported Nov. 2. The rate reached a record high of 69.2 percent in the second and fourth quarters of 2004.

Sales of existing homes were at an annual pace of 4.53 million in September, compared with the average rate of 5.82 million for the past decade, according to the Chicago-based National Association of Realtors. The pace in July was 3.84 million, the lowest in data going back to 1999.

Restricting access to credit threatens to slow a rebound even as reduced home prices and interest rates near record lows boost affordability, said Stevens, the FHA commissioner.

“This has a broad potential impact to the economic recovery in total,” he said. “We’re not asking for lenders to be reckless. In fact, we believe we have prudent policies for the market. But we do believe that lenders need to put more work into making certain that they provide accessibility for families who can qualify for a mortgage.”

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net; John Gittelsohn in New York at johngitt@bloomberg.net.

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; Kara Wetzel at kwetzel@bloomberg.net.

How does a bank "put more work into making certain?" This nonsense is bureaucratic bullshit.

Put to the bank at the peak

In the post Mortgages as Options, I discussed how people used the "put" feature of loans to transfer the risk of falling prices to the lender.

Another method speculators and homeowners alike used was the “put” option refinance. Late in the bubble when prices were near their peak, many homeowners refinanced their properties and took out 100% of the equity in their homes. In the process, they were buying a “put” from the lender: if prices went down (which they did,) they already had the sales proceeds as if they had actually sold the property at the peak; if prices went up, they got to keep those profits as well. The only price for this “put” option was the small increase in monthly payments they had to make on the large sum they refinanced. If fact, on a relative cost basis, the premium charged to these speculators and homeowners was a small fraction of the premiums similar options cost on stocks. Of course, mortgages are not option contracts, and lenders did not view themselves as selling option premiums to profit from the premium payments; however, speculators certainly did view mortgages in this manner and treated them accordingly.

The owner of today's featured property owned the property for 18 years, then it went into foreclosure. WTF? Anyone who thinks adding to their mortgage is a good idea should consider the possibility that they may lose their house years later. It's very foolish.

• This property was purchased for $133,500 sometime in 1992 — 18 years ago. The original loan information is not available.
• On 5/1/2002, he opened a HELOC for $53,600. The kool aid must have tasted good.
• On 1/28/2004 he obtains a loan for $117,838. This may have been a refinance of the first mortgage.
• On 4/1/2005 he obtained a $139,427 HELOC.
• On 2/28/2006 he got a GSE loan for $224,000.
• He stopped paying in late 2009, but Fannie Mae didn't fool around with the foreclosure.

Foreclosure Record

Recording Date: 06/02/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/01/2010

Document Type: Notice of Default

They bought the property at auction for $215,800, and now they are trying to get a full recovery of their losses in a resale. Do you think they will get it?

Irvine Home Address … 66 GOLDEN GLEN St 4 Irvine, CA 92604

Resale Home Price … $262,000

Home Purchase Price … $215,800

Home Purchase Date …. 7/20/2010

Net Gain (Loss) ………. $30,480

Percent Change ………. 14.1%

Annual Appreciation … 47.5%

Cost of Ownership

————————————————-

$262,000 ………. Asking Price

$9,170 ………. 3.5% Down FHA Financing

4.55% …………… Mortgage Interest Rate

$252,830 ………. 30-Year Mortgage

$51,505 ………. Income Requirement

$1,289 ………. Monthly Mortgage Payment

$227 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$44 ………. Homeowners Insurance

$240 ………. Homeowners Association Fees

============================================

$1,799 ………. Monthly Cash Outlays

-$119 ………. Tax Savings (% of Interest and Property Tax)

-$330 ………. Equity Hidden in Payment

$16 ………. Lost Income to Down Payment (net of taxes)

$33 ………. Maintenance and Replacement Reserves

============================================

$1,399 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,620 ………. Furnishing and Move In @1%

$2,620 ………. Closing Costs @1%

$2,528 ………… Interest Points @1% of Loan

$9,170 ………. Down Payment

============================================

$16,938 ………. Total Cash Costs

$21,400 ………… Emergency Cash Reserves

============================================

$38,338 ………. Total Savings Needed

Property Details for 66 GOLDEN GLEN St 4 Irvine, CA 92604

——————————————————————————

Beds: 2

Baths: 1 full 1 part baths

Home size: 864 sq ft

($303 / sq ft)

Lot Size: n/a

Year Built: 1971

Days on Market: 109

Listing Updated: 40463

MLS Number: S627597

Property Type: Condominium, Residential

Community: El Camino Real

Tract: Ws

——————————————————————————

According to the listing agent, this listing is a bank owned (foreclosed) property.

Upper Level End Unit Condo in Irvine. 2 Bedrooms, 1.25 Baths, and 1 Car Detached Garage. New carpet, new paint, and ready to open escrow. Enjoy the association amenities. HOA dues include water and trash. Close to shopping, restaurants, and schools.

Sales volumes are way down, and home prices are about to follow.

Irvine Home Address … 17501 TEACHERS Ave Irvine, CA 92614

Resale Home Price …… $583,731

This is my life

And people try to shut me down

Put my music on

And those people don't make a sound

Down down down down down

Everybody falling down down down down down

And they falling

Space Cowboy — Falling Down

Prices are falling, and they are about to go negative year-over-year. If interest rates go up, the price decline may gain momentum and lead to a significant leg down in local prices.

Housing prices flat, sales sinking

JEFF COLLINS — Nov. 16, 2010

The housing market continued to struggle against fierce headwinds last month, losing ground in the face of tightfisted lenders and edgy buyers.

The median price of an Orange County home – or price at the midpoint of all sales – fell to $438,000 last month, housing tracker MDA DataQuick reported Tuesday.

That's the lowest since April and up just 0.3 of a percentage point (or $1,500) from the October 2009 median.

Next month, we will likely see a year-over-year decrease in the median home price. The double dip will be official. The next milestone will be breaking below the false bottom put in during 2009.

Meanwhile, sagging sales stretched into their fourth month, with 2,298 Orange County homes trading hands in October.

That's 9 percent fewer than in September and 17.9 percent below the October 2009 tally.

While sales typically drop from September to October, last month was the second-slowest for an October since DataQuick began tracking home sales in 1988. It also was nearly 36 percent below the average of around 3,600 housing deals in a typical October.

I keep repeating it because the bulls do not get it: sales volumes are way, way down. The only people who believe sales are strong are those getting their information from the Irvine Company marketing team. For every 3 sales that ordinarily occurs in October, only 2 happened last month.

The market appeared to be on fire during the first half of the year. But industry insiders now fret that state and federal tax breaks failed to ignite a stronger, longer-lasting recovery after ending in the second half.

"A lot of us were disappointed that the wind that would be in our sails just faded," observed Jeff Culbertson, executive vice president for Coldwell Banker's Southwestern U.S. region, which includes Orange County.

"We're not in a bad market," Culbertson added. "But we're not in a good market."

Used house salesmen never give up. They won't admit the obvious: the market is very weak and prices are too high. The reason realtors are not trusted is obvious. They lie. They ignore the obvious. The candy coat a turd and expect buyers to eat it.

Although October was the 14th consecutive month of year-over-year price increases, the gain was the smallest of a streak dating to September 2009.

Last month's median price also fell $12,000 from the 2010 high of $450,000 reached in May and July. That means that all the price gains of the past year have virtually evaporated.

At $280,000, the median price of an O.C. condo fell 11.7 percent from last year's levels;

How do you get a move-up market while condos continue to implode? You don't.

the median price of a newly built home decreased 1.1 percent.

I thought the Irvine Company was increasing prices and building even more homes. That isn't what the statistics are saying.

"Things have slowed down and agents are starting to get worried," said Irvine top-producer Mac Mackenzie. "I think buyer confidence has been reduced, and people are having trouble getting (their loans) approved."

"We're not seeing any move-up buyers," added Harry Solomon, managing owner of Nova Real Estate Services in Laguna Hills. "If you can't sell the little condo because you're upside-down, you're certainly not going to buy something else. … If you don't have the equity to move up, people are going to renting."

Agents noted also that home sales at the high end of the housing market, which appeared on the verge of taking off, stalled recently.

In whose fantasy was the high end on the verge of taking off? The high end awaits its comeuppance. Prices will fall very hard at the high end when they get around to booting out the squatters.

For example, sales of $650,000 or more accounted for 30.4 percent of all home sales in July. Last month, they accounted for 27.6 percent of all deals.

"Once we get over (an asking price of) $1.5 million, it seems like it's quiet in the marketplace," said Newport Beach luxury home sales agent Steve High.

That's because nobody can afford those prices with their real incomes. Prices only got over $1.5M because we underwrote stupid loans at those price levels. Now nothing but air supports those prices. (see How to Lose $2,650,000 in Irvine Real Estate)

High noted that despite some of the lowest interest rates in history, buyers still are having a hard time qualifying – especially those seeking to get so-called "jumbo" loans of around $730,000 or more.

"You keep hearing about these low interest rates, but we still have a huge challenge in people qualifying for loans," High said.

Without liar loans, people have to qualify based on their income. And contrary to the popular fantasy of OC posers, there are not enough high wage earners in Orange County to support all the houses at those price points.

In Orange County's lower-cost central core, well-priced homes are getting offers within two weeks, said Santa Ana real estate agent Hector Ramirez of Citivest Realty Services.

Investors continue to buy three-bedroom houses selling for as low as $300,000, Ramirez said. With rent averaging $1,900 a month or more for such houses, the income will easily cover monthly loan payments. But such deals are hard to find.

Only a fool would pay $300,000 for a property grossing $1,900 a month rent. It may cover the loan payment, but it won't likely cover the other costs of ownership and have positive cashflow. I put an investor in a Las Vegas house for about $105,000 that grosses $1,300 a month in rent. That is a cashflow investment.

"There's not much to choose from," he said.

And even at the low end, the pace of sales also subsided since homebuyer tax credits dried up in June.

Lenders seized 604 homes from defaulting owners last month, 16.1 percent fewer than in October 2009, DataQuick reported.

Lenders also filed 1,501 default notices – the first stage in the foreclosure process – on borrowers who missed three or more payments. That's nearly a third fewer than the year-earlier level.

And since the rate of notices and foreclosures is a small fraction of the number of loan delinquencies, we continue to build an enormous shadow inventory. (see There are 36,000+ Distressed Properties in Orange County)

High, the Newport Beach agent, noted that prices will hold so long as the foreclosure rate holds steady.

But, he warned, "If we see an abundance of bank-owned properties coming on the market, we will see some volatility in prices."

Yes, downward volatility.

Culbertson, Coldwell Banker's regional chief, noted that the market needs to get over an "emotional drag," a sense among buyers that it's safe again to make a move. That won't occur until people start to hear more positive news about the economy and the job market, he said.

In other words, we need to give potential buyers a healthy dose of bullshit in order to dupe them into buying. This guy is shameless.

"The market that we're in right now," Culbertson said, "may be the market we're going to have to live with."

Register staff writer Jonathan Lansner contributed to this report.

Contact the writer: 714-796-7734 or jcollins@ocregister.com

Foreclosure after 20 years loan ownership

Many loan owners started out in the late 90s and the 00s, so a housing bubble and irresponsible lending is all they know. However, many others survived the previous housing bubble and should have known better than to borrow themselves into oblivion. Today's featured owner borrowed all he could as soon as he could. He didn't leave much equity in the house before the market collapsed.

• This house was purchased on 3/30/1990 for $260,000. The original mortgage information is not available, but it was likely a $208,000 first mortgage and a $52,000 down payment. That purchase date was the peak of the previous bubble. This owner spent most of the 90s underwater.
• On 12/9/1997 he refinanced with a $243,000 first mortgage. As soon as the market bottomed, this borrower went Ponzi.
• On 2/5/1998 he obtained a $50,000 stand-alone second.
• On 12/14/2001 he refinanced with a $289,000 first mortgage.
• On 5/23/2002 he obtained a $72,000 HELOC.
• On 7/15/2003 he got a $322,000 first mortgage.
• On 1/26/2005 he opened a $150,000 HELOC.
• On 1/27/2006 he obtained a $592,000 Option ARM with a 2.2% teaser rate.
• On 2/16/2006 he got a $65,000 HELOC.
• On 6/26/2006 he enlarged his HELOC to $85,000.
• Total property debt is $677,000.
• Total mortgage equity withdrawal is $469,000.

If he hadn't borrowed the $469,000 as it appeared, he would only have netted about $300,000 on the transaction. Mortgage equity withdrawal is certainly the most efficient method for obtaining real estate equity. Of course, it is theft, and it requires sacrificing your credit score, but the potential gains are enormous. No wonder so many did it.

Irvine Home Address … 17501 TEACHERS Ave Irvine, CA 92614

Resale Home Price … $583,731

Home Purchase Price … $260,000

Home Purchase Date …. 3/30/1990

Net Gain (Loss) ………. $288,707

Percent Change ………. 111.0%

Annual Appreciation … 3.9%

Cost of Ownership

————————————————-

$583,731 ………. Asking Price

$116,746 ………. 20% Down Conventional

4.55% …………… Mortgage Interest Rate

$466,985 ………. 30-Year Mortgage

$114,752 ………. Income Requirement

$2,380 ………. Monthly Mortgage Payment

$506 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$97 ………. Homeowners Insurance

$224 ………. Homeowners Association Fees

============================================

$3,207 ………. Monthly Cash Outlays

-$398 ………. Tax Savings (% of Interest and Property Tax)

-$609 ………. Equity Hidden in Payment

$198 ………. Lost Income to Down Payment (net of taxes)

$73 ………. Maintenance and Replacement Reserves

============================================

$2,470 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,837 ………. Furnishing and Move In @1%

$5,837 ………. Closing Costs @1%

$4,670 ………… Interest Points @1% of Loan

$116,746 ………. Down Payment

============================================

$133,091 ………. Total Cash Costs

$37,800 ………… Emergency Cash Reserves

============================================

$170,891 ………. Total Savings Needed

Property Details for 17501 TEACHERS Ave Irvine, CA 92614

——————————————————————————

Beds: : 5

Baths: : 3

Sq. Ft.: : 2067

$0,282

Lot Size: : 5,509 Sq. Ft.

Property Type:: Residential, Single Family

Style:: Two Level, A-Frame

Year Built: : 1971

Community: : Westpark

County: : Orange

MLS#: : S639286

On Redfin: : 2 days

——————————————————————————

BEST VALUE IN IRVINE AND MAY BE IN SOCAL. !!! PRICED FOR QUICK SALE!!!! THIS is it, don't miss this one. 5 Bed room 2.5 bath in great neighbour. Association pool, spa, basket ball court, Tennis court available. Great freeway access and very convinient location. Show and Sell.

neighbour? convinient?

After the flurry of ALL CAPS, the realtor ended the sentence fragment with a period, then she added three exclamation points. Half way through this description, there is no information, but plenty of extraneous realtorspeak. Awful.

This video is long, but it is worth a listen.