will all loans become FHA if insurers fail?

sniglet

It looks like the mortgage insurers are on an increasingly shaky footing. Will all mortgages go the FHA route if the mortgage insurers fail?

It's almost looking as if the entire private sector real-estate finance industry is about to disappear. First private securitization disappeared, and now we are seeing the mortgage insurers implode. The only entities left will be those that are backed (and bailed out by) the government.

If the industry loses its footing, it could transform the way consumers buy homes, either with a return to 20 percent down payments or a shift of even more of the market to the Federal Housing Administration.

Challenges facing the industry are significant. Credit-rating agencies, including Moody's Investors Service, have downgraded some of the largest players. One firm, Triad Guaranty Insurance Corp., is going out of business. Shares of Radian Guaranty, Triad and PMI Mortgage Insurance have lost 90 percent of their value in the past year.

http://www.washingtonpost.com/wp-dyn/content/article/2008/08/13/AR2008081303539.html

rose-colored-coolaid

If 20% were to become a requirement again due to no real estate insurance, even just temporarily, we would see lower real estate prices (adjusted for inflation) than at any time since the great depression. That's the power of leverage in reverse.

sniglet

rose-colored-coolaid wrote:

If 20% were to become a requirement again due to no real estate insurance, even just temporarily, we would see lower real estate prices (adjusted for inflation) than at any time since the great depression. That's the power of leverage in reverse.

But this would just be a return to the way things were in the '80s, and that wasn't exactly a terrible time.

In any event, perhaps the only thing that would happen if the mortgage insurers went bust would be that all loans wound up going through FHA. That wouldn't be such a bit deal, would it?

sniglet

According to Rhonda Porter it looks as if most loans are starting to go the FHA route already, even though the private insurers are still in business.

Maybe this is just the way things will be in the future: most loans will just go through FHA. It's looking more and more as if the private mortgage finance industry is dead-in-the water.

I'm all ready seeing a majority of loans that are over 80% LTV (and even a few 80% LTV and under) go FHA.

http://www.raincityguide.com/2008/08/08/mortgage-rates-on-a-friday-afternoon/#comment-323481

rose-colored-coolaid

sniglet wrote:

But this would just be a return to the way things were in the '80s, and that wasn't exactly a terrible time.

In any event, perhaps the only thing that would happen if the mortgage insurers went bust would be that all loans wound up going through FHA. That wouldn't be such a bit deal, would it?

I agree in principal, but disagree in the results we draw. Such standards were great in the 1980s because they were no more strict than what was seen before.

Exhibit A) how many homeowners are now underwater or have essentially no equity.

Exhibit how inflated are prices based on the dual assumption that you can buy with little or no money down and that prices will go up.

Going back to 20% down right now will cut the legs out from under the industry. If many buyers were putting 3%-5% down, that tells you they could only have afforded 1/4th (or less) the house if required to put 20% down. This doesn't mean we'll see prices cut by 75% or anything, but it would essentially shut down the market for a time.

Combine that with rising foreclosures and I think it's possible such action in the market would truly destroy housing as an asset in a very brief period of time.

Charles Dean

They said 5 years ago that MI companies were going to go away with the advent of the 80/20 loan and they almost did because no one needed to buy their product.

Now that they're making money and have a product that people want again, they're also going to go away? I doubt that.

They'll take a hit for sure, but since secondary financing is completely gone now, there will always be MI companies. Even if some of them do go out of business. The industry won't collapse.

jillayne

I'm not so sure all loans will go FHA.

Even though FHA's downpayment requirement is 3%, soon to be 3.5% (and all of this can be in the form of a gift) FHA's underwriting guidelines are strict.

Cream puff conforming will be sent to the GSEs, everyone else to FHA, and to those who cannot meet FHA's guidelines, those folks will go to hard money lenders or back to the local, state-chartered banks....what's left of them when this mess is over....at much, much higher interest rates.

Charles Dean

The latest housing bill pretty effectively killed FHA's relevance again though.

The main advantage for FHA before subprime and zero down hit was that it was the downpayment assistance program. It made FHA essentially the only zero down loan out there outside of VA and USDA mortgages.

That latest housing bill eliminated the downpayment assistance program, so now FHA is again no longer competitive.

It will be for those who have sub 660 credit scores. FHA guidelines are difficult and it's a much more expensive loan to get than a traditional conventional mortgage.

sniglet

tarzanchuck wrote:

The latest housing bill pretty effectively killed FHA's relevance again though.

That latest housing bill eliminated the downpayment assistance program, so now FHA is again no longer competitive.

Not competitive with what? What options other than FHA are currently open to borrowers who want/need to put less than 10% down?

Charles Dean

There are still plenty of 3% or 5% down options that are non-FHA. Just traditional conventional loans.

sniglet

It looks as if pretty much all the mortgages in states with "declining" values will require 10% down unless they are FHA. Luckily, Washington doesn't yet have one of these declining market designations. However, if that should happen, lending criterion will tighten even more.

as of 8/25 RMIC is out of the 95% market in 'declining value' states for all intents and purposes. Just four months ago the market heralded Fannie and Freddie for riding to the rescue and removing their 'declining market policy' and allowing borrowers go to go 95% again. But the decision is and always was out of their control. It matter not if the GSE's will buy the loan, it matters if lenders can insure the loan.

Now, by default Radian is the last man standing. But Radian is one of the weakest and there is much uncertainty regarding their ability to survive. Besides that, why would this one insurer want to take all of the 95% risky business on their own. Why would banks want to take on the counter-party risk involved with doing 95% loans through one of the weakest MI companies.

http://mrmortgage.ml-implode.com/2008/09/01/say-goodbye-to-95-fanniefreddie-loans-10-soon-to-be-required/