What Do You Know About FHA?

FHA update

FHA-the Good Guys

Don’t have much down payment? Credit scores not the best? Have many, many bills? If these apply to you and you still want to buy a house and have enough income, then FHA may be the loan for you. FHA has been providing loans for 80 years and is still going strong. In fact, during this recent recession, FHA has often been the only available source for mortgage funds as other banks hoarded their funds. In the past few years, FHA has provided about half of all new mortgages.

In fact, In 2010, FHA provided 56 % of loans for all first-time home buyers, and 60 percent of all African-American and Hispanic home buyers. In addition, 85% of borrowers obtaining homes at the higher loan limits had incomes below $150,000, and nearly 65% had incomes less than $100,000.

FHA, Federal Housing Authority, was established by the US government in 1934 to help buyers get mortgages so they could purchase homes. FHA does not originate mortgages, but FHA provides a guarantee, backed by the faith and credit of the US government, so that lenders using the program are more inclined to provide the money as the risk to them is much less.

Since FHA has been around for so long, over the years various myths and untruths have circulated among potential buyers and sellers.

fha

1. FHA is Bankrupt-WRONG

Because recently so many buyers are using the FHA program to purchase homes, the  idea that FHA must be bankrupt or will go bankrupt has emerged. How can the government underwrite so many loans? What if we have another downturn? Will the government be on the hook for trillions of dollars if can’t pay?

This is a complete myth. It’s especially ridiculous because at this very moment FHA’s current cash reserves total $33.7 billion – a $400 million increase from a year ago. These reserves are fully capitalized to pay 30 years’ worth of expected claims and losses. By comparison, the Financial Accounting Standards Board only requires private financial institutions to hold reserves for losses over the next 12 months. FHA has 30 times that amount in their cash reserves, plus another $2.55 billion in the excess capital reserves.

So, adios to that idea. FHA is totally solvent.

2. FHA Was Hit Hard By Foreclosures-WRONG

Many, if not most, banks were hit hard by the current recession, so FHA must have suffered more than most. This is a companion myth to the FHA is bankrupt.

Here’s the real skinny. Yes, FHA was hit by foreclosures; it did have to guarantee some bad home loans. But, the reality is that most of those loans were the older ones, written pre-2006. These loans represent less than 25% of FHA’s portfolio. Realty is 75% of FHA loans were written after 2009 and have superbly good rates of payment.

Loans originated in 2010 & 2011 have the best performance in the 13 year history of the Neighborhood Watch data system with a seriously delinquent rate of 1.85%. Loans originated in last two years now comprise only 7% of the seriously delinquent loans in FHA’s portfolio.

3. New Higher Loan Limits Are Much Riskier-WRONG

As prices on properties began to rise, especially in states like California and New York, many would-be FHA buyers were shut out as loan limits were very low for those areas. So, Congress approved higher loan limits for selected areas. As usual, naysayers grew frightened, reasoning that higher loan amounts put FHA at higher risk.

Here’s the problem with that reasoning. Actually, higher loan amount on the more expensive homes tend to perform better than on the lower-priced homes. This makes sense as you realize that buyers had to qualify for these homes and so have higher incomes and most likely more assets and savings in cash of difficulty.

4. FHA Buyers Are Poor Risks-WRONG

FHA borrowers in FY 2011 have an average credit score above 700. This is the first time the average credit score for FHA borrowers broke the 700 mark. FHA credit quality has improved steadily since 2007, 4th quarter. Over 50% of FHA loans made in every quarter since 2009 (2nd quarter) had credit scores above 680. In 2006 and 2007, only about 20% of the FHA loans insured in 2006-2007 had credit scores above 680.

That’s all well and good, but the great thing about FHA is that those with lower credit scores, but decent income can also qualify as FHA programs are very flexible. And, yes, the down payment required is still 3.5% of the purchase price, though with various FHA fees that amount to more like 7%, still the lowest around. Viva FHA!

L.A. County Home Prices: February 2009

South Pasadena City Hall
Image via Wikipedia

The news is still grim and grimmer for February 2009. L.A. County median home value has now sunk to an almost unbelievable $295,000. This represents a 37% drop over the previous year, but that’s only part of the story as prices had already sunk more than 10% by that date. Remember prices started to slide in September, October 2007.

Part of the reason for the precipitous drop in home values, as mentioned here repeatedly, is the wipe-out occurring in outlying areas, such as Lancaster [over 50% decline] and Littlerock [64% decline] which were offering many new homes to commuters. These homes are now almost worthless and dropping all the time due to adjustable mortgages, sub-prime loans and repossessions, in short the panoply of ills we have all learned about in the last year as our economy has tanked. Other areas of massive decline in L.A. County include Watts [61% down], Firestone Park [-52%], Eagle Rock [-51%] and Boyle Heights [-55%].

In the San Gabriel Valley, the eastern part of the L.A. County, the situation is not so bad, though, as always, working-class areas are hardest hit. In fact, only Pomona in the San Gabriel Valley comes close to the dire drops of northern L.A. County. Across its three ZIPs, Pomona has lost 40% to a median of $200,000 in 91766, 37% to a median of $195,000 in 91767 and in 91767 anothrer 37% drop to a median of $185,000.  Marching these declines are only Azusa at 47% drop to $235,000, followed by South El Monte at negative 38%.

The biggest surprise has to be  La Verne down 38% to a median of $369,000. If this trend holds, in fact, this would make LaVerne the biggest bargain east of the 605 because it has housing stock that is for the most part very well maintained along with a very good school system and plenty of infrastructure support.

For the rest of the east, Baldwin Park is down 31% to a median of $255,000,  Covina is down about 20% to a median of about $350,000 except in the South Hills where it’s down barely 2% to a median of $478,000 with just a couple of sales. Sales are weak  in Glendora 91740 where the median has dropped 25% to  $350,000; even more anemic sales in 91741 show a rise of 36% to a median of $660,000. Neither figure is reliable as sales are too scanty to know what is going on there.

Rounding out the east, Claremont has essentially held its own for the year with a median of  $570,000. Diamond Bar has dropped 11% to a median of $451,000. San Dimas has gained 10% over last year with a median of $543,000. Over its three ZIPs, West Covina has lost over 25% of its home values falling to a median of about $410,000.

On the west side of the 605 Sierra Madre has gained 2% to a median of $745,000. San Marino has gained 36%, but that is based on only 4 sales and so means little. South Pasadena has remained stable with a median of $725,000, again based on only a couple of sales. Arcadia has taken quite a dip-42% in 91006 to $485,000 and 14% negative in 91007 to $750,000. Some of these medians may seem high,but when you’ve paid more than a million dollars for your property, it’s no picnic watching it plumment to even $750,000.

Duarte is down 27% to $295,000 while Monrovia is down 30% to a median $400,000–both based on quite a few sales. Altadena is down 19% to a median of $443,000. Our major city, Pasadena, as always shows mixed results. In prestigious 91106 the median value is still over $1,000,000, a slight increase, again based on a negligible number of sales. 91107 shows a drop of 10% to $630,000, 91105 a 16% drop to $773,000, 91104 13% negative to $557,000 and 91103 a 34% drop to $310,000 median.

The situation does not appear to be improving significantly, but I can say that many of the stats were based on so few sales as to make them meaningless.  Few sales is also a negative in itself, of course, but  the coming of Spring to the Southland also opens the homehunting season for buyers who this year have an amazing array of help available to them in tax credits, higher FHA loan limits, and various city and county grants.

On the positive side,  perhaps Obama’s Plan will help some of these underwater homeowners. I am always available for discussion at 626-641-0346 or email at drdbroker@yahoo.com. The new administration has presented some plans to help those suffering from the precipitous drop in home values.

Figures are courtesy of MDA DataQuick in LaJolla, supplied by L.A. Times.

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