Posted by John Scott Smith on Thu, Mar 11, 2010 @ 10:34 AM
Last Friday, the Wall Street Journal reported that the FHA might be taking too much risk and stands a good chance of having to go to congress for additional money.
It says that there are too many FHA mortgage loans to borrowers who will run a high risk of foreclosure. This is the money quote, "Such underwater borrowers are generally more likely to default if they lose their jobs or have trouble meeting mortgage payments, because they can't easily sell their house." (My emphasis added.) Note, the reason that these mortgages are "underwater" defined as the borrower owes more than the property is worth is that the houses they bought have gone down in value since they were purchased, like most houses, in this country over the last several years.
Unfortunately, the Journal didn't get an FHA representative to effectively answer that specific claim. So, let me take a crack at it, using a quote from FHA commissioner, David Stevens.
As we noted in a recent blog post, when speaking in Denver, Stevens said, "our primary job is to serve the underserved buyer." Pretty good quote, actually.
The buyer who has ten or twenty percent of the purchase price to put down for a downpayment is generally not the one for whom the FHA is intended. Yes, that buyer would be a better risk because, should that person have their home value go down, they are more likely to be able to absorb the loss. But they had the capital to begin with. Borrowers who have the ability to save that kind of money are typically not needing the assistance of the government to become homeowners. It is the "underserved borrower", the one of limited means, who works for a living that the WSJ article suggests is too risky because, after all, that person might "lose their job".
Most of us would be a in pretty bad place pretty quickly if we lost our job in this environment. And, employment history is one of the things that FHA looks at in determining qualification: FHA is trying to find people who have job stability. In this recession, prior job stability is not necessarily an indicator of future job stability. So, should the FHA stop loaning money to working people who are only able to save up enough down payment for an FHA mortgage?
The argument can be made that we should limit the amount of mortgages that the FHA will insure. I have even heard arguments that the FHA should be abolished, altogether. They would say, "Let the free market handle it." That is a discussion and a conversation that we, as a nation, could have.
But, arguing that the FHA is lending to the wrong people (ie. lending to the ones to whom it is supposed to lend) is disingenuous. If they'd like to discuss whether we should keep an institution that has long been favored by the public, the same institution that has been helping the housing market since the real estate collapse started, then lets have that discussion. Let's not imply that those working people whom the FHA is intended to help are suddenly not worth our efforts. Those are not the people who got us into this mess. But, assuredly, they are the ones with the most to lose if FHA tightens up any further.
What do you think? Are the current guidelines appropriate? Or, is it time to reel in FHA lending?
Join the conversation and comment, below.
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Posted by John Scott Smith on Thu, Mar 04, 2010 @ 11:23 AM
Yesterday, I clicked on a Tweet from a friend who is a Florida Realtor, Debbie Kirkland. Debbie had a link to the Ginnae Mae calculator which compares the price of buying a home versus renting. It is absolutely worth taking a look at, here. VERY cool! However, you really gotta watch out for the bias that this calculator, and others like it, have in favor of buying. What do I mean by that? Let's take a quick look.
What's there?
Well, appreciation is there. Two percent (2%) of it, to be precise. The default setting for the "Yearly Home Value Increase Rate" is two percent. Now, you can change that number, but you can't make it "accurate". How can it not be accurate? Well, according to Zillow in the last twelve months, home prices have actually dropped by five percent (5%). When I tried to enter that number into the calculator, it unequivocally said, "The Value You Entered Must Be A Positive Number." So, there's that..
What's missing?
The calculator does not take into account any transactional costs. When you go to sell your home down the road, most home-owners will enlist the help of a real estate agent. (As with all professionals, always interview several before you decide on which one to choose.) There will be a commission for your real estate agent's services. In my experience, that can range anywhere from four to seven percent (4-7%) of the sales price of the home, and according to Mortgage News Daily, that will be in the neighborhood of six percent (6%). On a one hundred and fifty thousand dollar ($150,000) house, which is the default on the calculator, that's nine thousand dollars ($9,000). That's a fairly large chunk of change to leave out of the calculation, and the significance will be even more apparent in my next point.
The thing:
Yes, there's a thing. So when you look at the calculator, it is set to default to a one hundred and fifty thousand dollar house ($150,000), with two percent (2%) annual appreciation, for ten (10) years, and yadda, yadda, yadda... if you hit "calculate" it says that you will come out thirty-four thousand and sixty-three dollars ($34,063) ahead for buying versus renting. That's kinda huge! A total no-brainer, you really should buy.
If, however, we change the annual appreciation to "zero" (the lowest number that it will accept) and then subtract out the nine thousand dollar ($9,000) real estate agent commission when they sell the house for you in ten years, you come up with saving five thousand and sixteen dollars ($5,016) by renting, another no-brainer. Of course, you should rent.
I won't argue here whether you should or should not buy a home. (In the interest of full disclosure, I'll share that I've been a homeowner since 1997, and in that time I've owned and lived in four different houses.) But, don't let a calculator like this influence your decision when it's this biased.
Reasons for renting should include flexibility to move when you'd like, absence of maintenance as the landlord takes care of things, and the ability to quickly change your quality of living should something unexpected happen that is either good (like a promotion) or bad (like a reduction in hours).
Reasons for buying should include the privacy that no one who is not a guest can enter your home. There is the stability that no one can tell you that your lease is up, and it's time to move. There is usually a backyard for barbeques with family and friends. There is the freedom to decorate and paint any way you'd like without worry that it's going to come out of the security deposit.
There are any number of reasons to look at for renting and for buying. Most of these are intangible. They don't have a price tag, and they can't be added to that calculator.
Whether to buy a home is a big decision, and one that should make with a full weighing of all of the costs and the benefits. But, putting too much weight on how well you'll "do", financially? Well that requires that you have a crystal ball that's in good working order. Or at least one that's more accurate than Ginnie Mae's calculator...
So, what do you think? What are the most important reasons for you when it comes to buying or renting? Comment, below, and let us know!
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