Good News on Housing

[Gaspar]

  WASHINGTON (Dow Jones)--The delinquency rate on Federal Housing Administration mortgages continued to show improvement in the second quarter, a sign the agency may yet avoid a taxpayer bailout.

  The number of new 90-day delinquencies in the second quarter fell by 32% from the first quarter, the FHA reported Monday. Also, for the first time in recent years, 90-day delinquencies dropped from the year earlier.

  The FHA is taking steps to rebuild its capital reserves after they fell to razor-thin levels amid soaring defaults on FHA mortgages. The FHA insures low down-payment mortgages for borrowers who meet its standards.

  To shore up its finances, the FHA has tightened standards. For example, it now requires borrowers with down payments of less than 10% to have credit scores of at least 580.

Stricter standards are working!  I wonder if Barney has learned his lesson?

[nathanm]

Stricter standards are working!  I wonder if Barney has learned his lesson?

More likely the move to the 3.5% down requirement and the increase in up front MIP did the trick. The entire purpose of FHA loans has been to allow underserved populations to get loans they can't on the regular market. The real problem was that when the commercial lenders stopped doing subprime, the mortgage brokers who couldn't possibly bear to write less loans, foisted all their bad customers on FHA.

The FHA program has always had strict requirements related to recent negative information on one's credit report. (Must be 2 years post-BK, must be able to articulate a reason why the financial trouble won't recur, etc.)

It's quite unfortunate that the bad apples have messed it up for the people the program was intended to help. The worst part is that they now require your file be scorable. (but they'll take as low as 500)

[rwarn17588]

On a related note, a recent report showed that the rich have high a higher mortgage delinquency rate than the rest of the population:

http://www.nytimes.com/2010/07/09/business/economy/09rich.html

Key part:

"Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

"More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

"By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent."

[Cats Cats Cats]

580 still isn't that great of a credit score.

[Gaspar]

More likely the move to the 3.5% down requirement and the increase in up front MIP did the trick. The entire purpose of FHA loans has been to allow underserved populations to get loans they can't on the regular market. The real problem was that when the commercial lenders stopped doing subprime, the mortgage brokers who couldn't possibly bear to write less loans, foisted all their bad customers on FHA.

The FHA program has always had strict requirements related to recent negative information on one's credit report. (Must be 2 years post-BK, must be able to articulate a reason why the financial trouble won't recur, etc.)

It's quite unfortunate that the bad apples have messed it up for the people the program was intended to help. The worst part is that they now require your file be scorable. (but they'll take as low as 500)

I have two battling thought processes on this.

First of all, a credit score of 500 or below is a dangerous investment.  A young family with only one department store credit card or perhaps a high interest car loan will score higher than this.  500 is the score of a person with no credit history.  The purchase of a new home should not be their first priority.  They need to rent and develop some history.  They can do some significant damage to themselves and the rest of us (as we've seen).

Second, I hate the credit rating system.  My score was 770 last year.  It has dropped to 740.  Why?  Because I got rid of some cards that I infrequently use, paid off a car loan, and purchased a new house.  I have a 0 balance on everything except the mortgage.  I've never missed a payment. 

The credit scoring system at the low end is a good barometer of responsibility, but at the high end, it only serves as a marketing tool for credit companies.  I think their should be another way to score credit responsibility.

[Hoss]

I have two battling thought processes on this.

First of all, a credit score of 500 or below is a dangerous investment.  A young family with only one department store credit card or perhaps a high interest car loan will score higher than this.  500 is the score of a person with no credit history.  The purchase of a new home should not be their first priority.  They need to rent and develop some history.  They can do some significant damage to themselves and the rest of us (as we've seen).

Second, I hate the credit rating system.  My score was 770 last year.  It has dropped to 740.  Why?  Because I got rid of some cards that I infrequently use, paid off a car loan, and purchased a new house.  I have a 0 balance on everything except the mortgage.  I've never missed a payment. 

The credit scoring system at the low end is a good barometer of responsibility, but at the high end, it only serves as a marketing tool for credit companies.  I think their should be another way to score credit responsibility.

I always hated the way the credit scoring system worked.  I have been pretty good about maintaining my payments (except for a series of months in 2002 when I was unemployed and had to work some with two creditors).  Those items are currently off my history because of the 7 year expiration.

I paid off all my credit cards, didn't have ANY loans (car or otherwise) but had proven in the past that I was able to actually pay by bills (and never really failed to pay bills at all ever).

When I went to buy a new car, they ran the obligatory credit check and said my score came back with a 640.  The gentlemen telling me that told me that it wasn't because I had bad credit, but more because I had very little credit.  So, I pulled my TransUnion and sure enough, there wasn't much there.

I was able to get the auto loan, went ahead and got one credit card (low limit, just use in emergencies, blah blah) and last I checked my score was up to 740.

I agree with you, though.  The scoring system is flawed, but it was created by...you guessed it....the credit reporting companies.  It CAN be a good barometer on the low end, if by low end you mean people with little credit.  But, some people (like me) with little credit have a bit of disposable income and can make those payments.  They need to be looking at the bigger picture.  Monthly income vs debt load.  In the past, that's really the way lenders did this, by using the debt load ration.  A lot of lenders have gotten lazy and have allowed the scoring system to take over.

[nathanm]

580 still isn't that great of a credit score.

No, but the whole point of the program is to lend to responsible people who for whatever reason (usually medical bills) don't have a good credit score or even a score at all.

The interest rate is usually higher and they usually pay more for mortgage insurance.

Gaspar, it should be perfectly possible to get a home loan without a credit score. What do you think was done before charge cards and credit reports? The bank looked at your income and your expenses, made sure you had a stable job, and whatever else they needed to do to feel comfortable. That's what FHA does. If you do have bad history, they make you explain it and satisfy them that it's not going to recur if you have anything to say about it.

They look at the total history, not just a number.

Besides, they do much better at lending to those with low scores or no credit than most institutions did. Probably because they won't insure exotic products and won't lend to just anybody. They do require smaller down payments, but the borrower pays for the risk in upfront MIP and a higher ongoing mortgage insurance cost.

There are a bunch of dishonest mortgage brokers out there (I got to see that first hand when one particular jackass wanted me to lie about my assets for a loan), and it annoys me to no end that they moved on to pillaging FHA once they got everything they could out of Fannie and Freddie.

[Conan71]

On a related note, a recent report showed that the rich have high a higher mortgage delinquency rate than the rest of the population:

http://www.nytimes.com/2010/07/09/business/economy/09rich.html

Key part:

"Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

"More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

"By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent."

Yeah, yeah, yeah.  The rich are evil and reckless, the poor are victims.

Granted, there are a lot of properties bought too late in the bubble on balloon notes and ARM's which speculators bought in hot markets expecting to cash in and they are walking away unable to service the debt.

The story assumes everyone with a $1mm mortgage to be "rich".  I don't know that I've heard a particular standard which defines "rich".  One fellow they cited has tapped equity from his home over years for various failed business enterprizes, and finally is deciding to get out from under the $9000 payment which he cannot afford.

When I was in California a few years back for a friend's college graduation, there was a graduation party for her at another friends house in a non-descript neighborhood in Irvine.  This house was maybe 1400 sq. feet, 25 years old, and not even a great view of anything.  $720,000.  It was explained to me that most houses in the neighborhood were $600K to $1mm.  Essentially, these homes would have sold in the $125 to $200K range in Tulsa.  This was a decidedly middle class neighborhood, not lavish, nowhere close to a Beverly Hills lifestyle.  By my standards, anyhow, these people were not "rich". 

Look at what was selling for $1mm up and down the coast of California over the last 10 years, those were not mini Taj Mahals.

[Gaspar]

No, but the whole point of the program is to lend to responsible people who for whatever reason (usually medical bills) don't have a good credit score or even a score at all.

The interest rate is usually higher and they usually pay more for mortgage insurance.

Gaspar, it should be perfectly possible to get a home loan without a credit score. What do you think was done before charge cards and credit reports? The bank looked at your income and your expenses, made sure you had a stable job, and whatever else they needed to do to feel comfortable. That's what FHA does. If you do have bad history, they make you explain it and satisfy them that it's not going to recur if you have anything to say about it.

They look at the total history, not just a number.

Besides, they do much better at lending to those with low scores or no credit than most institutions did. Probably because they won't insure exotic products and won't lend to just anybody. They do require smaller down payments, but the borrower pays for the risk in upfront MIP and a higher ongoing mortgage insurance cost.

There are a bunch of dishonest mortgage brokers out there (I got to see that first hand when one particular jackass wanted me to lie about my assets for a loan), and it annoys me to no end that they moved on to pillaging FHA once they got everything they could out of Fannie and Freddie.

Oh, I don't disagree.  The whole credit scoring system is the first flaw in a chain of flaws that leads up to problems like what we just experienced.  There should be a better way to score the worthiness of people applying for loans. 

[we vs us]

On a related note, a recent report showed that the rich have high a higher mortgage delinquency rate than the rest of the population:

http://www.nytimes.com/2010/07/09/business/economy/09rich.html

Key part:

"Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

"More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

"By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent."

I read that article when it came out and was underwhelmed with it as a datapoint in the widening income disparity argument.  As Conan says, there're plenty of markets in the US where a million dollar mortgage is worth much less than it is in Tulsa.  And at the height of the subprime boom being handed a jumbo loan didn't necessarily indicate you had the wherewithal to pay it back, or the collateral to back it. 

But my question for the righties here:  let's say that there is a widening disparity between the rich and everybody.  Let's say that fewer people control more resources than they have since, say, WWII.  Isn't this a trend we should encourage?  Shouldn't we work with all haste to get the rich folks MORE of our resources, rather than less?  I don't know how to do that beyond rejiggering tax rates.  Perhaps we need to get rid of the minimum wage, holiday pay, etc.  Give employers total control over setting employment conditions.  Perhaps on an individual level we should turn down raises.  Perhaps we should save them as much money as possible so that they can, in turn, seed more small businesses so that we can return to full employment. 

[Conan71]

But my question for the righties here:  let's say that there is a widening disparity between the rich and everybody.  Let's say that fewer people control more resources than they have since, say, WWII.  Isn't this a trend we should encourage?  Shouldn't we work with all haste to get the rich folks MORE of our resources, rather than less?  I don't know how to do that beyond rejiggering tax rates.  Perhaps we need to get rid of the minimum wage, holiday pay, etc.  Give employers total control over setting employment conditions.  Perhaps on an individual level we should turn down raises.  Perhaps we should save them as much money as possible so that they can, in turn, seed more small businesses so that we can return to full employment. 

Most definitely. /snark

WTH was that rant all about?  I guess I'm too much in tune with my personal wealth being what I "have" (intangible, non material) not what I "own" to care nor begrudge someone else who "owns" more than I do.  In the long run, I'm a whole lot happier and more fulfilled.   I've had points in my life where I "owned" more but I was much less happy than I am now.

I honestly don't get the left's obsession with an income and wealth gap.  Let those more monetarily blessed than I am suffer with it or prosper with it as they see fit.  It's really none of my business unless it impinges my freedom.  How exactly is it people earning $500K per year tread on the freedoms of those making minimum wage? 

[Gaspar]

I read that article when it came out and was underwhelmed with it as a datapoint in the widening income disparity argument.  As Conan says, there're plenty of markets in the US where a million dollar mortgage is worth much less than it is in Tulsa.  And at the height of the subprime boom being handed a jumbo loan didn't necessarily indicate you had the wherewithal to pay it back, or the collateral to back it. 

But my question for the righties here:  let's say that there is a widening disparity between the rich and everybody.  Let's say that fewer people control more resources than they have since, say, WWII.  Isn't this a trend we should encourage?  Shouldn't we work with all haste to get the rich folks MORE of our resources, rather than less?  I don't know how to do that beyond rejiggering tax rates.  Perhaps we need to get rid of the minimum wage, holiday pay, etc.  Give employers total control over setting employment conditions.  Perhaps on an individual level we should turn down raises.  Perhaps we should save them as much money as possible so that they can, in turn, seed more small businesses so that we can return to full employment. 

Don't really know where that rant is going, but for what it's worth, no.

By "we" I'm sure you mean government (lefty thing).  No government shouldn't work to increase or decrease the economic status of any person.  Mainly because that doesn't work.  Government has the power to impose limits and barriers.  It does not have the power to create wealth.  That power lies within the individual.  If the government gets out of the way and an individual has the drive, innovation and experience, he/she will create wealth.

As for the disparity between the wealthy and the poor, the way that you combat that is the same.  Get out of the way.  Allow the poor to have broader access to better schools (vouchers for private education).  Give them access to better jobs by removing the barriers to hiring (taxes, regulations, minimum wage laws, and now Obamacare). 

There will always be poor.  All that we can do is make sure that they have all of the same tools and opportunities available to every other american.  Government has never been a successful partner to the poor.  Government has only developed dependence, and addiction.   


Past studies by and large confirm the prediction that higher minimum wages reduce employment opportunities and raise unemployment, particularly among teenagers, minorities and other low-skilled workers. – Masanori Hashimoto

Low-income workers as a group are the major victims of minimum wage legislation. – Keith B. Leffler

The more laws and restrictions there are, the poorer the people become. – Lao Tsu

The higher entry standards imposed by licensing laws reduce the supply of professional services ... The poor are the net losers, because the availability of low-cost service has been reduced. In essence, the poor subsidize the information research costs of the rich. – S. David Young

Somehow, the fact that more poor people are on welfare, receiving more generous payments, does not seem to have made this country a nice place to live – not even for the poor on welfare, whose condition seems not noticeably better than when they were poor and off welfare. Something appears to have gone wrong; a liberal and compassionate social policy has bred all sorts of unanticipated and perverse consequences. – Irving Kristol

[Red Arrow]

How exactly is it people earning $500K per year tread on the freedoms of those making minimum wage? 

You have apparently forgotten that there is a fixed amount of wealth out there.  If someone is greedy and makes $500,000/yr instead of a more equitable $125,000/yr, then there is $375,000 less money available to spread around.

[nathanm]

Income inequality is a problem because it leads to higher crime rates, more poverty, and generally makes this country a worse place to live. And it's got significant (bad) economic consequences.

[Conan71]

You have apparently forgotten that there is a fixed amount of wealth out there.  If someone is greedy and makes $500,000/yr instead of a more equitable $125,000/yr, then there is $375,000 less money available to spread around.

Damn, I keep forgetting that, komrade.  Can I borrow your copy of the manifesto when you are done with it? 

Certainly all of the $375K will be horded or sent offshore to some bank account instead of being used for consumption which provides jobs for others in the economy therefore we must confiscate it and let the government spread it around more efficiently.  Obviously buying expensive cars, furniture, boats, RV's, or spending it on lavish dinners or vacations doesn't provide a single job.