FHA in Deep Trouble: Default Rates Skyrocketing

According to this Nashville Business Journal article, FHA reserves feeling the squeeze, and this CNBC article, FHA Cash Reserves to Fall Below Required Levels, high levels of FHA loan defaults have pushed FHA cash reserves below the mandated minimum levels.

Both articles state that the head of the FHA said that the agency will not need a tax payer bailout, that the FHA will hire a chief risk officer and that underwriting criteria will be tightened including higher minimum credit scores and stricter appraisal rules. The Nashville Business Journal article quotes the new release statements of FHA Commissioner David H. Stevens as saying "To be clear, the fund's reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action. That said, given the size and scope of the FHA and its importance to today's market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protections."

According to the Nashville Business Journal article, the FHA has become an increasing source of mortgages for first time homebuyers. The problem is that the article also quotes a statistic from the Mortgage Brokers Association, which shows that about 1 in 6 FHA borrowers were behind on their mortgage payments (i.e. in default). That is a 16.67% mortgage default rate.  In other words it is TERRIBLE!  This will ultimately lead to lots of FHA foreclosures and short sales.

While I would like to believe the FHA's statements about not needing a bailout, I cannot. Mark my words, the FHA will indeed need a bailout. You just cannot lend people 96.5% of the purchase price of their home in a declining market and not expect large numbers of foreclosures. Even if the market was flat the FHA buyers would have negative equity due to the cost of selling a home exceeding their down payment.

Due to the Middle Tennessee housing market having relatively lower housing prices and incomes than other areas of the country, there are a lot of FHA home purchases. As a result expect a lot of FHA foreclosures and short sales in Middle Tennessee.

What the Government Should Do to Help the Housing Market: Stop Meddling in Housing and FIX THE ECONOMY

How should the government fix the housing market? The answer, stop meddling in the housing market. Instead, the government should focus on the economy. The fundamental question is why have jobs been leaving the US for the last 3 decades? Answer: taxes, government regulations (think environmental regulations that punish companies while doing nothing to help the economy such as CO2 emissions, etc., hiring quotas, employment laws, etc.) and labor unions. Fix those problems and employment and income rises. After several years maybe incomes will catch up enough and housing prices will fall enough that we actually reach a sustainable ratio of median home prices to median incomes (normally median home prices in an area are 3x incomes in that area) when overall employment is stable.

Right now we have increasing unemployment, increasing foreclosures and short sales, but artificial government meddling. This is causing confusion and chaos. For those who think we can ride this out with a 1 year extension of the tax credit, etc., please look at the stats. Foreclosures will remain at very high levels for 3-5 years and at high levels for several years beyond that. Unemployment, will start to go down in about 12-18 months, but it will not go back down to the 4.5%-5.5% levels of 2004-2005 because the economy (and the employment market) was so dependent on consumer spending and that spending will not come back since it was fueled and enabled by easily obtainable debt that is no longer available.

While this mess hurts me right now as a REALTOR and a homeowner who is trying to sell their home due a relocation, I know this is true. Declining housing prices are good for the economy. It will free up homeowners' capital that can be spent and/or invested in other areas instead of being sucked up by artificially high housing payments. It will enable people to actually eventually own their own homes and live with less debt and stress instead of living on the absolute edge. It is better to pay less for a home with higher interest rates then to pay more (and borrow more) at lower rates. This is all just a deleveraging of the US economy, which IS NECESSARY.

Mark my words, eventually the government subsidizing of the real estate market will end and the housing market will decline more. It is unavoidable.

My Thoughts on the "Doomed" Housing Market: Listen When "Dr. Doom" Speaks

According to this CNBC article, US Economy Facing 'Death by a Thousand Cuts': Roubini, Nouriel Roubini says "more banks will fail and residential real estate prices have more room to decline."  According to Roubini, the economy faces a real threat of a "double dip" recession due to the severely damaged financial system and a lack of consumer spending.  Roubini says "the securitization market is all but dead, the credit markets are still frozen and consumers will continue to save more rather than spend and boost growth."  He predicts that by the time this financial and economic crisis is all over the following will happen:

• More than 1,000 financial institutions could fail.
• Housing prices will likely to fall another 12 percent in the next year making the total decline approximately 40 percent since the market began its steep decline. This will result in nearly one half of all homeowners owing more on their mortgages than their houses are worth.

Regarding housing construction, Roubini states "The gap between supply and demand is so huge we could stop producing new homes for a year to get rid of all the inventory  This price adjustment, in my opinion, is going to continue for another year."

Regarding commercial real estate, he warns that regulators are repeating some of the same mistakes made during the financial crisis. He states "Allowing forbearance in the deeply troubled sector will mask underlying problems that will come back and bite the economy".

While I do have a BA degree with a major in Economics from an Ivy League University, I am not a professor or professional economist.  However, I have been saying much of the same for months now.  That is that housing prices are still too high and there is still too much new construction.  We do not need new construction reduced to such and such levels - we need all new spec construction to come to a halt for at least a year.  Of course, that will not happen.  Instead new homes will be built, housing will continue to decline, more short sales and foreclosures will occur and more bailouts will be doled out to foolish banks and lenders.  It's an endless cycle of disaster.

With respect to the Middle Tennessee real estate market:

• Rutherford County Tennessee: Murfreesboro TN, Smyrna TN and La Vergne TN (LaVergne TN)
• Williamson County Tennessee: Brentwood TN and Franklin TN
• Davidson County Tennessee: Nashville TN and Belle Meade TN

I have been saying since I moved here in September 2008 that the Middle Tennessee housing and commercial real estate market is significantly over built and that housing prices are still too high.  Since the peak of the real estate market in Middle Tennessee occurred in late 2007/early 2008 (i.e. 2 years later than most places) the market here will decline for a few more years.  Also, a large portion of the homes sold with 95-100% subprime and FHA financing which have high default rates so short sales and foreclosures will be high in Middle Tennessee.  Therefore, I predict that the Middle Tennessee real estate market will do worse than the US average over the next few years.

Navigating Short Sales - Help and Assistance for Sellers Who May Need to Sell via a Short Sale

The information below is intended to provide help and assistance for sellers who may need to sell their home via s short sale as a result of a personal hardship (i.e. illness, job or income loss, etc.) and their home being worth less than the total mortgage balances. This information is valuable for sellers in any area of the country. However, I personally service the following areas in Middle Tennessee:

• Rutherford County Tennessee: Murfreesboro TN, Smyrna TN and La Vergne TN (LaVergne TN)
• Williamson County Tennessee: Brentwood TN and Franklin TN
• Davidson County Tennessee: Nashville TN and Belle Meade TN

Navigating Short Sales: What to Do When the Sale Price Leaves You Short

If you're thinking of selling your home, and you expect that the total amount you owe on your mortgage will be greater than the selling price of your home, you may be facing a short sale. A short sale is one where the net proceeds from the sale won't cover your total mortgage obligation and closing costs, and you don't have other sources of money to cover the deficiency. A short sale is different from a foreclosure, which is when your lender takes title of your home through a lengthy legal process and then sells it.

1. Consider loan modification first. If you are thinking of selling your home because of financial difficulties and you anticipate a short sale, first contact your lender to see if it has any programs to help you stay in your home. Your lender may agree to a modification such as:

• Refinancing your loan at a lower interest rate
• Providing a different payment plan to help you get caught up
• Providing a forbearance period if your situation is temporary

When a loan modification still isn’t enough to relieve your financial problems, a short sale could be your best option if

• Your property is worth less than the total mortgage you owe on it.
• You have a financial hardship, such as a job loss or major medical bills.
• You have contacted your lender and it is willing to entertain a short sale.

2. Hire a qualified team. The first step to a short sale is to hire a qualified real estate professional* and a real estate attorney who specialize in short sales. Interview at least three candidates for each and look for prior short-sale experience. Short sales have proliferated only in the last few years, so it may be hard to find practitioners who have closed a lot of short sales. You want to work with those who demonstrate a thorough working knowledge of the short-sale process and who won't try to take advantage of your situation or pressure you to do something that isn't in your best interest.

A qualified real estate professional can:

• Provide you with a comparative market analysis (CMA) or broker price opinion (BPO).
• Help you set an appropriate listing price for your home, market the home, and get it sold.
• Put special language in the MLS that indicates your home is a short sale and that lender approval is needed (all MLSs permit, and some now require, that the short-sale status be disclosed to potential buyers).
• Ease the process of working with your lender or lenders.

• Negotiate the contract with the buyers.
• Help you put together the short-sale package to send to your lender (or lenders, if you have more than one mortgage) for approval. You can’t sell your home without your lender and any other lien holders agreeing to the sale and releasing the lien so that the buyers can get clear title.

3. Begin gathering documentation before any offers come in. Your lender will give you a list of documents it requires to consider a short sale. The short-sale “package” that accompanies any offer typically must include

• A hardship letter detailing your financial situation and why you need the short sale
• A copy of the purchase contract and listing agreement
• Proof of your income and assets
• Copies of your federal income tax returns for the past two years

4. Prepare buyers for a lengthy waiting period. Even if you're well organized and have all the documents in place, be prepared for a long process. Waiting for your lender’s review of the short-sale package can take several weeks to months. Some experts say:

• If you have only one mortgage, the review can take about two months.
• With a first and second mortgage with the same lender, the review can take about three months.
• With two or more mortgages with different lenders, it can take four months or longer.

When the bank does respond, it can approve the short sale, make a counteroffer, or deny the short sale. The last two actions can lengthen the process or put you back at square one. (Your real estate attorney and real estate professional, with your authorization, can work your lender’s loss mitigation department on your behalf to prepare the proper documentation and speed the process along.)

5. Don't expect a short sale to solve your financial problems. Even if your lender does approve the short sale, it may not be the end of all your financial woes. Here are some things to keep in mind:

• You may be asked by your lender to sign a promissory note agreeing to pay back the amount of your loan not paid off by the short sale. If your financial hardship is permanent and you can’t pay back the balance, talk with your real estate attorney about your options.

• Any amount of your mortgage that is forgiven by your lender is typically considered income, and you may have to pay taxes on that amount. Under a temporary measure passed in 2007, the Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act, homeowners can exclude debt forgiveness on their federal tax returns from income for loans discharged in calendar years 2007 through 2012. Be sure to consult your real estate attorney and your accountant to see whether you qualify.

• Having a portion of your debt forgiven may have an adverse effect on your credit score. However, a short sale will impact your credit score less than foreclosure and bankruptcy.

Note: This article provides general information only. Information is not provided as advice for a specific matter. Laws vary from state to state. For advice on a specific matter, consult your attorney or CPA. 

Reprinted from REALTOR® magazine (REALTOR.org/realtormag) with permission of the NATIONAL ASSOCIATION OF REALTORS®.

Copyright 2008. All rights reserved.

Residential Home Sales Market Statistics: A Comparison of Normal Sales versus Short Sales and Foreclosures in August 2009

Middle Tennessee Residential Property Foreclosure Activity Report
Residential Real Estate Market Sales Activity - Foreclosures, Pre-foreclosures and Short Sales Compared to Regular Listings
Counties & Cities/Towns Covered:
Rutherford County Tennessee: Murfreesboro TN, Smyrna TN and La Vergne TN (LaVergne TN)
Williamson County Tennessee: Brentwood TN and Franklin TN
Month & Year	August 2009
Start Date	8/1/2009
End Date	8/31/2009
City/Town	Active Listings - Total	Active Listings - % Foreclosures & Short Sales	Pending Sales - % Foreclosures & Short Sales	Months of Residential Inventory Based on Pending Sales Rate
Murfreesboro	1,322	8.25%	13.22%	5.46
Smyrna	389	13.11%	18.33%	6.48
La Vergne	291	20.27%	47.54%	4.77
Brentwood	645	3.41%	5.56%	11.94
Franklin	1,127	2.75%	3.03%	11.38
Totals & Averages	3,774	7.21%	15.12%	7.31
Notes:
As you can see from the chart above the percentage of Pending Sales that are distress sales (Foreclosures and Short Sales) is greater than their representation as a percentage of Active Listings.  This means that these distressed listings are Pending (i.e. selling) at a faster rate then regular listings.