Is FHA really going to insure $104.5 billion of mortgage debt that will be underwater?

I keep reading articles about the FHA refinance program for underwater mortgages and it’s top housing news item this week. As you probably had read it’s a proposal to use FHA to refinance home owners that have negative equity (underwater) loans that can’t get this refinancing. It’s estimated to reach to 3.5 million to 5 million of these home owners and to refinance their existing home mortgage at the current low mortgage rates. The targeted loans are ones that were not package through Fannie Mae or Freddie Mae. Then I started to wonder how much would this FHA insured debt would be underwater? Not the total debt, but the debt that will not be secured by an asset, just the FHA insurance plan.

Now, I’m trying to get the best data on the all the variables; what is the average home loan to refinanced, what is the average percent the home owner has in negative equity, and how many homes does FHA plans to refinance. I’m lacking some concrete data, so I had to use some historical data and some best guesstimates. Taking what limited data I had I did some quick calculations and here’s my methodology:

Total Estimated FHA insured Negative Equity Under FHA Refinance
Percent of the mortgage is composed of negative equity	10%
Average mortgage in 2005-2007 nationwide	$209,000
Total negative equity per mortgage	$20,900
Total number of mortgages to be refinanced	5 million
Totaled FHA Insured negative equity under this program	$104,500,000,000

Now, I just doing my best to estimate this problem, please remember $104.5 billion is only the negative equity portion of the total debt to be refinanced. The actual figures could be much better, my point is that should be a discussion on the potential losses to FHA, if these homeowners that refinanced decide later to strategically default. My analysis doesn’t even cover the costs FHFA is going to give lenders as an incentive to refinance homeowners with underwater mortgages. There is even a push to include more loans in this program by increasing the eligible Loan to Value (LTV) ratio above 125% in current programs and I believe this new program might have an upper LTV limit of 140%. Here are some possible additional costs (default costs) of this program if these refinanced homeowners decided to strategically default:

• The FHA insured portion of the loan is typically 20% of the mortgaged value not the 10% calculated above.
• Costs of sell transactions could up to 10% of the home value if default were to occur.
• Mortgage Rate Risk, in the near future mortgage rates could increase and borrower might strategically default if they see home vaules further decreasing.

Since these loans were originally not Fannie Mae or Freddie Mac loans, defaulting on those loans would cost the bank money. This FHA program would transfer the risk from private banks to FHA, and by extension to all of us. The federal government would be again expanding it’s role in the housing market again by insuring more home loans.

To be the fair in this loss estimate, the previous HARP/HAMP programs were way short of there goal to perform permanent loan modifications for homeowners that have Fannie Mae or Freddie Mac loans. It was estimated that 3 million to 4 million home loans would be modified and only $933,000 modifications were approved. In addition, banks would have to agree this program and do they have enough staff to process so many additional loans request? However, there is a re-default value with these loan modifications . At 18 months after modification all loans have a 90+ day default rate of 23 percent. Could this program have a similar default rate, only time will tell.

This could end up being a very expense program if underwriting standards were lowered to fit the maximum number of home owners possible into the program. Finally, FHA is almost insolvent itself, even though a separate fund would be created for these loans so they wouldn’t commingle with regualr FHA loans. But who would pay of the losses if there were an exceeding higher number of defaults? The Obama Administration is asking for tax on the biggest banks to pay of this program and TARP (taxpayers) funds will also be used to finance this program. A third source of funds is rumored to be the Robo-signing settlement with the State AG’s. Would this plan also charge the normal FHA insurance premimum as possible for fourth source of funding, that would increase the mortgage rate on the new loan.

There’s another cash flow aspect to this refinance program, if a higher interest loan was refinanced to a lower interest rate loan, it won’t necessary generate additional benefits for the economy. The investor that owns the orginal loan wouldn’t be receiving that higher revenue steam after the refinance and would have to settle for a lower paying investment. Also, homeowner that refinanced his loan might just bank the savings in the payment, so the expected immediate economic stimulus might not happen so quickly.

In summary, the $104.5 billion is an estimate based on imperfect data. However, even 25% of this estimate came true, there would be huge costs to the taxpayers. Our federal debt is already 100% of Gross Domestic Product, should we be adding more to that debt?

Hat Tip to Mellow Ruse

I had to post this home. This homeowner has dropped their listings price $200,000 or 33% in the last 8 months. This was owner that was hoping that the bubble was still going. Plus, the house has no real upgrades and plus no real grass in the backyard. In addition, it’s a short sale, even though the owners purchased the house a long time ago.
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Proprietary North OC Housing News home purchase analysis

2516 SANTA YSABEL Ave Fullerton, CA 92831

$400,000 …….. Asking Price
$400,000 ………. Purchase Price
2/7/2012 ………. Purchase Date

$0 ………. Gross Gain (Loss)
($32,000) ………… Commissions and Costs at 8%
============================================
($32,000) ………. Net Gain (Loss)
============================================
0.0% ………. Gross Percent Change
-8.0% ………. Net Percent Change
#NUM! ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$400,000 …….. Asking Price
$14,000 ………… 3.5% Down FHA Financing
3.88% …………. Mortgage Interest Rate
30 ……………… Number of Years
$386,000 …….. Mortgage
$104,779 ………. Income Requirement

$1,816 ………… Monthly Mortgage Payment
$347 ………… Property Tax at 1.04%
………… Mello Roos & Special Taxes
$100 ………… Homeowners Insurance at 0.3%
$444 ………… Private Mortgage Insurance
………… Homeowners Association Fees
============================================
$2,707 ………. Monthly Cash Outlays

($279) ………. Tax Savings
($568) ………. Equity Hidden in Payment
$19 ………….. Lost Income to Down Payment
$120 ………….. Maintenance and Replacement Reserves
============================================
$1,998 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$5,500 ………… Furnishing and Move In at 1% + $1,500
$5,500 ………… Closing Costs at 1% + $1,500
$3,860 ………… Interest Points
$14,000 ………… Down Payment
============================================
$28,860 ………. Total Cash Costs
$30,600 ………. Emergency Cash Reserves
============================================
$59,460 ………. Total Savings Needed
——————————————————————————————————————————————-
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599……
sales@ochousingnews.com…..

Name	*
Email	*
Phone	*

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