y***@news.top
2009-06-16 17:25:46 UTC
Home Loan Scamming Is Still Going Strong -- and Now You're Paying for
It
By Yasha Levine. Posted June 16, 2009.
Everything the real estate industry tells you is a hustle. No industry
is more geared toward pumping up the positive and burying anything
remotely negative, leaving you -- and truth -- out in the cold.
The crash has not made real estate agents any more honest, but at
least the gap between the industry's crazed optimism and stark reality
has grown so obvious that even the real estate industry can't hide it
anymore.
Nowhere is this more obvious than in Victorville, Calif., an exurb of
Los Angeles situated in the high desert where housing bubbled up
higher than just about anywhere at the peak of the subprime-lending
craze and is still in free fall today.
These days, there are a lot of lies and broken dreams buried in the
gravelly sand on which Victorville was built. During the last real
estate boom, this barren wasteland was the mecca of low-income
homeownership, proof that the American Dream was within reach of all.
Tract-home developers stripped away the rocks and tumbleweeds and
Joshua trees, replacing them with mazes of curvy streets and cul de
sacs with soothing names like Cottontail Drive, Steeplechase Road and
Ladybird Lane, lining them with the cheapest McMansions in California.
Things exploded out of control this past decade, with the population
doubling to 100,000 in just eight years.
But that whole way of life is over now. Unemployment in Victorville is
way above the national average, and violent crime has shot up. Homes
prices have plunged to 1989 levels and many stand empty. Banks don't
even bother to putting them on the market.
Yet, last week, the press started hyping up the supposed real estate
sales-driven economic turnaround that was about to sweep the country.
"Honk if You Think It's Over," read a June 7 New York Times headline.
"The panic in the Manhattan real estate market of the winter of 2009
lifted in the last few weeks, brokers say, as more and more buyers and
sellers have found the courage and the comfort level to sign on the
dotted line."
The Washington Post went even further: "Economists, senior government
officials and ordinary consumers are all showing greater confidence in
the outlook for the economy. ... There are unquestionable signs of
economic progress." ABC News went with a rhetorical structure: "Has
the Recession Finally Ended? Strong Home Sales Are Just One Indicator
That the Economy May Be on the Mend."
From where I sit, this reads like pure fiction. It runs contrary to
virtually every economic piece of data available: rising unemployment,
growing credit card debt, a massive shadow inventory of foreclosed
homes and a wave of defaulting ARM and commercial loans that's just
around the corner.
But there is something else, too. And it is as deadly to our vampiric
debtor economy as a stake through the heart: the FHA loan. By
guaranteeing certain mortgages, the Federal Housing Administration has
been helping middle- and low-income Americans purchase their first
homes ever since the 1930s.
But this modest leg-up program has been been hijacked and transformed
into the new subprime-loan market operated by lenders who are as
corrupt, predatory and shortsighted as the original, and maybe even
more so. Because this time taxpayers have been put on the hook for the
risk well in advance. Real-estate insiders have been sounding the
alarm about this new shadow subprime mortgage market -- which is now
almost $600 billion strong -- for months now. But instead of
listening, Congress has been trying to expand the FHA loan program.
Not surprisingly, it seems that risk-free loans are the only way they
banks can be persuaded to start lending again. But I wanted to find
out firsthand how much of an impact these loans were having on the
housing market. So last weekend, I shaved, put on a clean shirt and
headed out for a day of shopping in Victorville.
Around here, it is much easier to shop for a brand new home than to
find someone who will show you one of the many foreclosed ones. You
don't need to make an appointment with a real estate agent, hunt down
open houses on a Sunday afternoon or attend auctions. All you have to
do is take a drive any day of the week during normal business hours
and look out for the huge signs plastered around town. They are not
easy to miss.
It took me five minutes to spot a new development on the very edge of
Victorville's sprawl. The sign was dark green and advertised a
development called "Braeburn at West Creek," with luxurious and
spacious homes offered for around $200,000. The development had a
quiet, upper-class suburb feel to it: new cars, landscaped lawns, no
traffic and wide streets. Passing a group of kids playing basketball
in the middle of one of the streets, I pulled up in front of the
Braeburn sales office, built into the garage of a model two-story
McMansion painted a trendy brown.
It was 3 p.m. on Saturday, prime house-hunting time. With all this
buying activity the industry was reporting, I half-expected to run
into other bargain shoppers like myself. But I was the only customer
in the real estate office.
"Hello! Have you come to see the houses?" a chipper female voice
yelped from a distant corner of the office. "Give me a second, I'll be
right out." I couldn't get a visual on her. It was huge, this garage
-- er, office -- big enough to hold three cars, easily the size of a
decent apartment. Schematic drawings hung on the walls showing all the
wonderful house configurations you could order.
That was when the voice appeared in human form: a blond middle-aged
woman emerged from a corner office with a bundle of keys. Braeburn had
three floor plans to choose from, she quickly started explaining. But
I could only look at two of them. The third was still under
construction. But if I wanted to, I could drive around and look at it:
"It is quite far along in the building process."
The homes were all quite similar: all three had two floors, four to
five bedrooms and range of 2,454 to 2,765 square feet. All of them had
what's called a "great room," something you see in new home
developments that combines the kitchen, living and dining rooms into
one great open space.
"We have sold 105 homes so far, and I have about 30 homes left," the
agent said, whipping out a photocopy list of Braeburn's homes,
complete with lot numbers. "Right now we are headed into this cul de
sac. This is our last cul de sac." The rest of the homes would be
built on mere streets. She circled homes numbered 85 through 98
surrounding a dead end street called Window Rock Court.
"This is a nice neighborhood. I have a few foreclosures in here, but
if you drive the neighborhood and ask the people, they'll tell you how
they like it here. And how they are real comfortable. I got some
correctional officers here, LAPD, teachers from the school."
Jesus, I thought. What a neighborhood. Prison guards, cops and their
school-teacher wives. All die-hard small-government Republicans, no
doubt. And all in government employ. The last gainfully employed
people in this country, and they're always talking shit about their
employer, Big Government.
"But go look at the houses for yourself first. We can talk about it
when you go back."
The model homes were fully furnished, and looked like they came out of
a Martha Stewart magazine with a theme of "the antique and modern in
harmony." I had to hand it to them, it worked. It felt like home, as
long as you didn't look out of the master bedroom window. The
mini-highway and a barren desert wasteland dotted with high-voltage
power lines squashed that comfort feeling.
These houses were clearly a step up from the entry-level McMansion I
lived in just a few blocks away. But were they worth the extra
$100,000 that you could be saving if you tried to get one of few
foreclosed properties that are on the market? The sales lady assured
me they were, and besides I'd never get a house for that price in
Victorville.
"I have a lot of people coming in here that have been bidding on
foreclosures until they are sick of it. They bid and they bid and they
bid, and 20 other people are bidding, too. You throw a number out, and
you never get anywhere. So they say 'I want my tax credit. I want my
new home. I'm gonna pick my own carpet. I know it's under 10-year
structural warranty and two-year cosmetic warranty.' "
Are the news reports about the increase in home sales true, I asked.
She nodded. "I've been here for three years. Last year was really slow
going, but this year has been really good. I've had four sales last
month, three sales the month before that. First-time home buyers,
that's what I'm getting. People are like prices are down, the rates
are low ... time for me to get a house.' So why not? People are not
afraid of getting into homeownership. So that's a good sign, right?"
Of course, I nodded. Great for the economy. Great for Victorville. But
the longer we talked, the more obvious it was FHA loans were at the
core of a real estate scam of frightening proportions that was
reinflating the real estate bubble with taxpayers' money, all in the
name of economic recovery.
"Oh yes, we work with a lender. All you have to do is come in and let
me worry about the paperwork. Right now you'll probably be able to get
a 5 percent interest loan, which is good. And credit history is not
much of a problem. We are doing just FHA loans, so we don't even go by
a FICO score. If you haven't been late in the last 12 months on
anything, you are eligible. People get in here with credit scores of
580s and 600s, but they've been on their job for 15 years, and they
got a good history. The FHAs, that's what's helping out the first-time
home buyers."
The FHA was helping the developers out, too. Even with boosts like the
new accounting rules that allow banks to keep existing homes off the
market (which boosts banks' assets and inflates home values by
limiting supply) and taxpayer-funded cash perks for purchases of newly
constructed homes, it could only work with zero-risk loans. No bank
would consider giving a loan on obviously overpriced homes these days,
especially with people with borderline bad credit. But thanks to the
FHA, lenders literally cannot lose on these high-risk customers. So
they are happy to hand out loans to all comers. In fact, places like
Braeburn only sell to people who qualify for an FHA-backed mortgage:
first-time home buyers. Fact is, FHA loans were the only reason places
like Braeburn were still open for business. And that may not be such
good thing.
FHA loans have been around since the Great Depression, helping
working-class Americans buy their first homes by providing government
insurance that guarantees certain types of loans at no risk to the
lender. Until recently, they have been largely a force for good.
During the civil rights movement, for example, FHA loans were retooled
to help African Americans purchase homes. But like most public
programs designed to help the American people, the FHA has been
hijacked by big business -- in this case, the banking and real estate
industries.
It was really a coup de etat for everyone involved. When the subprime
market collapsed, President George W. Bush pushed Congress to heavily
expand the the FHA loan program, increasing its budget, lowering entry
requirements for both lenders and debtors. Eventually, our elected
officials even took care of the bothersome 3.5 percent down payment
requirement for the loan with all sorts of free cash.
Right now, the FHA is in essence giving out no-money-down loans to
anyone who doesn't already own a house, regardless of credit history.
In California, first-time homebuyers purchasing a freshly built home
receive instant cash in the form of a tax credit: $8,000 from the feds
(soon to be increased to $16,000) and $10,000 from the state. Local
governments are also throwing in some goodies.
"I have some some money from the school facility fees that I can get.
Like you need 3.5 percent down, but I can get you about $4,000 of that
from down-payment sources. That just came back. It was gone but it's
back," said the sales lady at Braeburn, lowering her voice just a bit
that made it seem this was some sort of racket. "And we pay the
$10,000 closing costs for you, as well. It's a win-win situation."
Win-win, indeed. If you bought Braeburn's largest home at base price,
you'd pay nothing up front and have more than $5,000 left over for
some new furniture, a 40-inch LCD TV and a weekend trip to Disneyland.
Homeowners have never been offered a better deal, but many won't hold
on to their purchases for very long. It is common real estate industry
knowledge that the less a buyer puts on a down payment, the more
likely that buyer is to default. But no one seems to care, not the
banks and not our government. In fact, Connecticut Sen. Chris Dodd,
hardworking bank-shilling Democrat, has been pushing to increase
access to FHA by making them available anyone, and not just first-time
homeowners. He also wants to push the new-home federal tax credit to
$15,000.
Under the guise of helping economic recovery, the bill is really a
multidimentional wealth transfer, funding bank profits with taxpayer
money while cutting taxes (tax credit is just another way of reducing
tax revenue). This plan has received wide support.
The whole racket is so crude and so obviously doomed to end in
disaster that papers like the Wall Street Journal, normally a champion
of Thatcherite houseowning, have tried to blow the whistle:
The Next Housing Bust
Everyone knows how loose mortgage underwriting led to the go-go days
of multitrillion-dollar subprime lending. What isn't well known is
that a parallel subprime market has emerged over the past year -- all
made possible by the Federal Housing Administration. This also won't
end happily for taxpayers or the housing market.
Last year, banks issued $180 billion of new mortgages insured by the
FHA, which means they carry a 100 percent taxpayer guarantee. Many of
these have the same characteristics as subprime loans: low down
payment requirements, high-risk borrowers, and in many cases, shady
mortgage originators. FHA now insures nearly 1 of every 3 new
mortgages, up from 2 percent in 2006.
The financial results so far are not as dire as those created by the
subprime frenzy of 2004-2007, but taxpayer losses are mounting on its
$562 billion portfolio. According to Mortgage Bankers Association
data, more than 1 in 8 FHA loans is now delinquent -- nearly triple
the rate on conventional, non-subprime loan portfolios. Another 7.5
percent of recent FHA loans are in "serious delinquency," which means
at least three months overdue.
The FHA is almost certainly going to need a taxpayer bailout in the
months ahead. The only debate is how much it will cost. By law, FHA
must carry a 2 percent reserve (or a 50-to-1 leverage rate), and it is
now 3 percent and falling. Some experts see bailout costs from $50
billion to $100 billion or more, depending on how long the recession
lasts.
Private profits, public risk. It is a lurid example of the New
Capitalism at work, exposing the cannibalistic nature of our society.
Even the institutions created to serve the interests of the public
have been perverted into instruments of theft.
Business Week, another conservative financial outlet, was actually
warning about the FHA scam back in 2008:
For generations, these loans, backed by the Federal Housing
Administration, have offered working-class families a legitimate means
to purchase their own homes. But now there's a severe danger that
aggressive lenders and brokers schooled in the rash ways of the
subprime industry will overwhelm the FHA with loans for people
unlikely to make their payments. Exacerbating matters, FHA officials
seem oblivious to what's happening -- or incapable of stopping it.
They're giving mortgage firms licenses to dole out 100 percent-insured
loans despite lender records blotted by state sanctions, bankruptcy
filings, civil lawsuits and even criminal convictions.
More Bad Debt
As a result, the nation could soon suffer a fresh wave of defaults and
foreclosures, with Washington obliged to respond with yet another
gargantuan bailout. Inside Mortgage Finance, a research and newsletter
firm in Bethesda, Md., estimates that over the next five years, fresh
loans backed by the FHA that go sour will cost taxpayers $100 billion
or more. That's on top of the $700 billion financial-system rescue
Congress has already approved. Gary E. Lacefield, a former federal
mortgage investigator who now runs Risk Mitigation Group, a
consultancy in Arlington, Texas, predicts: "Within the next 12 to 18
months, there is going to be FHA-insurance Armageddon."
Yet the FHA scam goes on, despite these warnings, for the simple
reason that it's the only thing driving an otherwise moribund real
estate market. Without these FHA loans, the whole thing would
collapse, sooner rather than later. The Business Week piece was
published seven months ago. That leaves five months, more or less,
before the Armageddon it predicts.
But for now, this racket -- and the couple of trillion dollars pumped
into the financial sector -- are showing borderline modest results. On
average, pending home sales rose by 6.7 percent in April. That's its
highest level since September and the sharpest increase in seven
years.
In Victorville, new housing developments are being kept inflated at
slightly below 2004 price levels. There has been a slight increase in
demand for new homes, too, causing some builders to start raising
prices.
A KB Homes development not far from where I live has sold all its
lots, raised prices by about 1 percent and even started a new
development -- smaller, and with less flash, more in sync with the
depressed market -- that will start selling homes sometime this fall.
Even Home Depot said its earnings for the month of May were better
than expected.
But if you walk just one block over from the booming Braeburn
community, a whole row of homes stands empty. It is a grim reminder of
the massive shadow inventory of foreclosed homes no one wants to think
about. New-home values are being inflated, but existing homes are
becoming increasingly worthless. In bubble cities all across
California, real estate has fallen below 1989 levels.
Median Home Prices Drop Below 1989 Levels in Some Parts of Southland
Properties in several areas are selling for less than they did 20
years ago, and that's not including inflation. Some first-time buyers
are nabbing houses for less than what their parents paid.
By Peter Y. Hong
June 10, 2009
In parts of Southern California, the housing crash has upended a basic
tenet of the American dream: that home values always increase over the
long term.
Properties in several areas are selling for less than they did 20
years ago, and that's not even counting the effects of inflation.
The government is knowingly flooding the market with homes at inflated
prices, setting young families up for default and massively increasing
taxpayers' exposure to more toxic debt ... and for what?
It's all about taking care of the banking and finance industry.
Bush was responsible for widening the scope of FHA loans with his
"HOPE for Homeowners" program, pledging to make $300 billion available
for FHA-backed refinancing that would've helped 400,000 families avoid
foreclosure. But the program seemed to be more about coming up with a
legitimate reason for getting as many lenders approved to take part in
the racket as quickly as possible than actually helping people
refinance their homes.
Six months after HOPE was signed into law, only one homeowner had
successfully refinanced with the program. At the same time, the number
of FHA-approved lenders doubled from around 16,000 to 36,000. It was
perfect timing, as many of them were subprime lenders looking for a
new gig.
Here's Business Week again:
FHA "faces a tsunami" in the form of ex-subprime lenders who favor
aggressive sales tactics and sometimes engage in outright fraud, says
Kenneth M. Donohue Sr., the inspector general for the Department of
Housing and Urban Development. "I am very concerned that the same
players who brought us problems in the subprime area are now
reconstituting themselves and bringing loans into the FHA portfolio,"
he adds.
FHA staffing has remained roughly level over the past five years, at
just under 1,000 employees, even as that tsunami has been building,
Donohue points out. The FHA unit that approves new lenders,
recertifies existing ones and oversees quality assurance has only five
slots; two of those were vacant this fall, according to HUD's Web
site. Former housing officials say lender evaluations sometimes amount
to little more than a brief phone call, which helps explain why
questionable ex-subprime operations can reinvent themselves and gain
approval.
So here we are. Subprime 2.0. Just like the last subprime bubble, it
might help the economy in the short term; real-estate industry profits
will soar, developers will keep the construction business running,
banks will look more solvent and inspire confidence in the economy,
which will help keep the bubble inflated. But it won't last.
The second contraction will come, and when it does, it'll be bigger
and badder than ever. And the government bailout will come straight
out of our pensions and health care.
It
By Yasha Levine. Posted June 16, 2009.
Everything the real estate industry tells you is a hustle. No industry
is more geared toward pumping up the positive and burying anything
remotely negative, leaving you -- and truth -- out in the cold.
The crash has not made real estate agents any more honest, but at
least the gap between the industry's crazed optimism and stark reality
has grown so obvious that even the real estate industry can't hide it
anymore.
Nowhere is this more obvious than in Victorville, Calif., an exurb of
Los Angeles situated in the high desert where housing bubbled up
higher than just about anywhere at the peak of the subprime-lending
craze and is still in free fall today.
These days, there are a lot of lies and broken dreams buried in the
gravelly sand on which Victorville was built. During the last real
estate boom, this barren wasteland was the mecca of low-income
homeownership, proof that the American Dream was within reach of all.
Tract-home developers stripped away the rocks and tumbleweeds and
Joshua trees, replacing them with mazes of curvy streets and cul de
sacs with soothing names like Cottontail Drive, Steeplechase Road and
Ladybird Lane, lining them with the cheapest McMansions in California.
Things exploded out of control this past decade, with the population
doubling to 100,000 in just eight years.
But that whole way of life is over now. Unemployment in Victorville is
way above the national average, and violent crime has shot up. Homes
prices have plunged to 1989 levels and many stand empty. Banks don't
even bother to putting them on the market.
Yet, last week, the press started hyping up the supposed real estate
sales-driven economic turnaround that was about to sweep the country.
"Honk if You Think It's Over," read a June 7 New York Times headline.
"The panic in the Manhattan real estate market of the winter of 2009
lifted in the last few weeks, brokers say, as more and more buyers and
sellers have found the courage and the comfort level to sign on the
dotted line."
The Washington Post went even further: "Economists, senior government
officials and ordinary consumers are all showing greater confidence in
the outlook for the economy. ... There are unquestionable signs of
economic progress." ABC News went with a rhetorical structure: "Has
the Recession Finally Ended? Strong Home Sales Are Just One Indicator
That the Economy May Be on the Mend."
From where I sit, this reads like pure fiction. It runs contrary to
virtually every economic piece of data available: rising unemployment,
growing credit card debt, a massive shadow inventory of foreclosed
homes and a wave of defaulting ARM and commercial loans that's just
around the corner.
But there is something else, too. And it is as deadly to our vampiric
debtor economy as a stake through the heart: the FHA loan. By
guaranteeing certain mortgages, the Federal Housing Administration has
been helping middle- and low-income Americans purchase their first
homes ever since the 1930s.
But this modest leg-up program has been been hijacked and transformed
into the new subprime-loan market operated by lenders who are as
corrupt, predatory and shortsighted as the original, and maybe even
more so. Because this time taxpayers have been put on the hook for the
risk well in advance. Real-estate insiders have been sounding the
alarm about this new shadow subprime mortgage market -- which is now
almost $600 billion strong -- for months now. But instead of
listening, Congress has been trying to expand the FHA loan program.
Not surprisingly, it seems that risk-free loans are the only way they
banks can be persuaded to start lending again. But I wanted to find
out firsthand how much of an impact these loans were having on the
housing market. So last weekend, I shaved, put on a clean shirt and
headed out for a day of shopping in Victorville.
Around here, it is much easier to shop for a brand new home than to
find someone who will show you one of the many foreclosed ones. You
don't need to make an appointment with a real estate agent, hunt down
open houses on a Sunday afternoon or attend auctions. All you have to
do is take a drive any day of the week during normal business hours
and look out for the huge signs plastered around town. They are not
easy to miss.
It took me five minutes to spot a new development on the very edge of
Victorville's sprawl. The sign was dark green and advertised a
development called "Braeburn at West Creek," with luxurious and
spacious homes offered for around $200,000. The development had a
quiet, upper-class suburb feel to it: new cars, landscaped lawns, no
traffic and wide streets. Passing a group of kids playing basketball
in the middle of one of the streets, I pulled up in front of the
Braeburn sales office, built into the garage of a model two-story
McMansion painted a trendy brown.
It was 3 p.m. on Saturday, prime house-hunting time. With all this
buying activity the industry was reporting, I half-expected to run
into other bargain shoppers like myself. But I was the only customer
in the real estate office.
"Hello! Have you come to see the houses?" a chipper female voice
yelped from a distant corner of the office. "Give me a second, I'll be
right out." I couldn't get a visual on her. It was huge, this garage
-- er, office -- big enough to hold three cars, easily the size of a
decent apartment. Schematic drawings hung on the walls showing all the
wonderful house configurations you could order.
That was when the voice appeared in human form: a blond middle-aged
woman emerged from a corner office with a bundle of keys. Braeburn had
three floor plans to choose from, she quickly started explaining. But
I could only look at two of them. The third was still under
construction. But if I wanted to, I could drive around and look at it:
"It is quite far along in the building process."
The homes were all quite similar: all three had two floors, four to
five bedrooms and range of 2,454 to 2,765 square feet. All of them had
what's called a "great room," something you see in new home
developments that combines the kitchen, living and dining rooms into
one great open space.
"We have sold 105 homes so far, and I have about 30 homes left," the
agent said, whipping out a photocopy list of Braeburn's homes,
complete with lot numbers. "Right now we are headed into this cul de
sac. This is our last cul de sac." The rest of the homes would be
built on mere streets. She circled homes numbered 85 through 98
surrounding a dead end street called Window Rock Court.
"This is a nice neighborhood. I have a few foreclosures in here, but
if you drive the neighborhood and ask the people, they'll tell you how
they like it here. And how they are real comfortable. I got some
correctional officers here, LAPD, teachers from the school."
Jesus, I thought. What a neighborhood. Prison guards, cops and their
school-teacher wives. All die-hard small-government Republicans, no
doubt. And all in government employ. The last gainfully employed
people in this country, and they're always talking shit about their
employer, Big Government.
"But go look at the houses for yourself first. We can talk about it
when you go back."
The model homes were fully furnished, and looked like they came out of
a Martha Stewart magazine with a theme of "the antique and modern in
harmony." I had to hand it to them, it worked. It felt like home, as
long as you didn't look out of the master bedroom window. The
mini-highway and a barren desert wasteland dotted with high-voltage
power lines squashed that comfort feeling.
These houses were clearly a step up from the entry-level McMansion I
lived in just a few blocks away. But were they worth the extra
$100,000 that you could be saving if you tried to get one of few
foreclosed properties that are on the market? The sales lady assured
me they were, and besides I'd never get a house for that price in
Victorville.
"I have a lot of people coming in here that have been bidding on
foreclosures until they are sick of it. They bid and they bid and they
bid, and 20 other people are bidding, too. You throw a number out, and
you never get anywhere. So they say 'I want my tax credit. I want my
new home. I'm gonna pick my own carpet. I know it's under 10-year
structural warranty and two-year cosmetic warranty.' "
Are the news reports about the increase in home sales true, I asked.
She nodded. "I've been here for three years. Last year was really slow
going, but this year has been really good. I've had four sales last
month, three sales the month before that. First-time home buyers,
that's what I'm getting. People are like prices are down, the rates
are low ... time for me to get a house.' So why not? People are not
afraid of getting into homeownership. So that's a good sign, right?"
Of course, I nodded. Great for the economy. Great for Victorville. But
the longer we talked, the more obvious it was FHA loans were at the
core of a real estate scam of frightening proportions that was
reinflating the real estate bubble with taxpayers' money, all in the
name of economic recovery.
"Oh yes, we work with a lender. All you have to do is come in and let
me worry about the paperwork. Right now you'll probably be able to get
a 5 percent interest loan, which is good. And credit history is not
much of a problem. We are doing just FHA loans, so we don't even go by
a FICO score. If you haven't been late in the last 12 months on
anything, you are eligible. People get in here with credit scores of
580s and 600s, but they've been on their job for 15 years, and they
got a good history. The FHAs, that's what's helping out the first-time
home buyers."
The FHA was helping the developers out, too. Even with boosts like the
new accounting rules that allow banks to keep existing homes off the
market (which boosts banks' assets and inflates home values by
limiting supply) and taxpayer-funded cash perks for purchases of newly
constructed homes, it could only work with zero-risk loans. No bank
would consider giving a loan on obviously overpriced homes these days,
especially with people with borderline bad credit. But thanks to the
FHA, lenders literally cannot lose on these high-risk customers. So
they are happy to hand out loans to all comers. In fact, places like
Braeburn only sell to people who qualify for an FHA-backed mortgage:
first-time home buyers. Fact is, FHA loans were the only reason places
like Braeburn were still open for business. And that may not be such
good thing.
FHA loans have been around since the Great Depression, helping
working-class Americans buy their first homes by providing government
insurance that guarantees certain types of loans at no risk to the
lender. Until recently, they have been largely a force for good.
During the civil rights movement, for example, FHA loans were retooled
to help African Americans purchase homes. But like most public
programs designed to help the American people, the FHA has been
hijacked by big business -- in this case, the banking and real estate
industries.
It was really a coup de etat for everyone involved. When the subprime
market collapsed, President George W. Bush pushed Congress to heavily
expand the the FHA loan program, increasing its budget, lowering entry
requirements for both lenders and debtors. Eventually, our elected
officials even took care of the bothersome 3.5 percent down payment
requirement for the loan with all sorts of free cash.
Right now, the FHA is in essence giving out no-money-down loans to
anyone who doesn't already own a house, regardless of credit history.
In California, first-time homebuyers purchasing a freshly built home
receive instant cash in the form of a tax credit: $8,000 from the feds
(soon to be increased to $16,000) and $10,000 from the state. Local
governments are also throwing in some goodies.
"I have some some money from the school facility fees that I can get.
Like you need 3.5 percent down, but I can get you about $4,000 of that
from down-payment sources. That just came back. It was gone but it's
back," said the sales lady at Braeburn, lowering her voice just a bit
that made it seem this was some sort of racket. "And we pay the
$10,000 closing costs for you, as well. It's a win-win situation."
Win-win, indeed. If you bought Braeburn's largest home at base price,
you'd pay nothing up front and have more than $5,000 left over for
some new furniture, a 40-inch LCD TV and a weekend trip to Disneyland.
Homeowners have never been offered a better deal, but many won't hold
on to their purchases for very long. It is common real estate industry
knowledge that the less a buyer puts on a down payment, the more
likely that buyer is to default. But no one seems to care, not the
banks and not our government. In fact, Connecticut Sen. Chris Dodd,
hardworking bank-shilling Democrat, has been pushing to increase
access to FHA by making them available anyone, and not just first-time
homeowners. He also wants to push the new-home federal tax credit to
$15,000.
Under the guise of helping economic recovery, the bill is really a
multidimentional wealth transfer, funding bank profits with taxpayer
money while cutting taxes (tax credit is just another way of reducing
tax revenue). This plan has received wide support.
The whole racket is so crude and so obviously doomed to end in
disaster that papers like the Wall Street Journal, normally a champion
of Thatcherite houseowning, have tried to blow the whistle:
The Next Housing Bust
Everyone knows how loose mortgage underwriting led to the go-go days
of multitrillion-dollar subprime lending. What isn't well known is
that a parallel subprime market has emerged over the past year -- all
made possible by the Federal Housing Administration. This also won't
end happily for taxpayers or the housing market.
Last year, banks issued $180 billion of new mortgages insured by the
FHA, which means they carry a 100 percent taxpayer guarantee. Many of
these have the same characteristics as subprime loans: low down
payment requirements, high-risk borrowers, and in many cases, shady
mortgage originators. FHA now insures nearly 1 of every 3 new
mortgages, up from 2 percent in 2006.
The financial results so far are not as dire as those created by the
subprime frenzy of 2004-2007, but taxpayer losses are mounting on its
$562 billion portfolio. According to Mortgage Bankers Association
data, more than 1 in 8 FHA loans is now delinquent -- nearly triple
the rate on conventional, non-subprime loan portfolios. Another 7.5
percent of recent FHA loans are in "serious delinquency," which means
at least three months overdue.
The FHA is almost certainly going to need a taxpayer bailout in the
months ahead. The only debate is how much it will cost. By law, FHA
must carry a 2 percent reserve (or a 50-to-1 leverage rate), and it is
now 3 percent and falling. Some experts see bailout costs from $50
billion to $100 billion or more, depending on how long the recession
lasts.
Private profits, public risk. It is a lurid example of the New
Capitalism at work, exposing the cannibalistic nature of our society.
Even the institutions created to serve the interests of the public
have been perverted into instruments of theft.
Business Week, another conservative financial outlet, was actually
warning about the FHA scam back in 2008:
For generations, these loans, backed by the Federal Housing
Administration, have offered working-class families a legitimate means
to purchase their own homes. But now there's a severe danger that
aggressive lenders and brokers schooled in the rash ways of the
subprime industry will overwhelm the FHA with loans for people
unlikely to make their payments. Exacerbating matters, FHA officials
seem oblivious to what's happening -- or incapable of stopping it.
They're giving mortgage firms licenses to dole out 100 percent-insured
loans despite lender records blotted by state sanctions, bankruptcy
filings, civil lawsuits and even criminal convictions.
More Bad Debt
As a result, the nation could soon suffer a fresh wave of defaults and
foreclosures, with Washington obliged to respond with yet another
gargantuan bailout. Inside Mortgage Finance, a research and newsletter
firm in Bethesda, Md., estimates that over the next five years, fresh
loans backed by the FHA that go sour will cost taxpayers $100 billion
or more. That's on top of the $700 billion financial-system rescue
Congress has already approved. Gary E. Lacefield, a former federal
mortgage investigator who now runs Risk Mitigation Group, a
consultancy in Arlington, Texas, predicts: "Within the next 12 to 18
months, there is going to be FHA-insurance Armageddon."
Yet the FHA scam goes on, despite these warnings, for the simple
reason that it's the only thing driving an otherwise moribund real
estate market. Without these FHA loans, the whole thing would
collapse, sooner rather than later. The Business Week piece was
published seven months ago. That leaves five months, more or less,
before the Armageddon it predicts.
But for now, this racket -- and the couple of trillion dollars pumped
into the financial sector -- are showing borderline modest results. On
average, pending home sales rose by 6.7 percent in April. That's its
highest level since September and the sharpest increase in seven
years.
In Victorville, new housing developments are being kept inflated at
slightly below 2004 price levels. There has been a slight increase in
demand for new homes, too, causing some builders to start raising
prices.
A KB Homes development not far from where I live has sold all its
lots, raised prices by about 1 percent and even started a new
development -- smaller, and with less flash, more in sync with the
depressed market -- that will start selling homes sometime this fall.
Even Home Depot said its earnings for the month of May were better
than expected.
But if you walk just one block over from the booming Braeburn
community, a whole row of homes stands empty. It is a grim reminder of
the massive shadow inventory of foreclosed homes no one wants to think
about. New-home values are being inflated, but existing homes are
becoming increasingly worthless. In bubble cities all across
California, real estate has fallen below 1989 levels.
Median Home Prices Drop Below 1989 Levels in Some Parts of Southland
Properties in several areas are selling for less than they did 20
years ago, and that's not including inflation. Some first-time buyers
are nabbing houses for less than what their parents paid.
By Peter Y. Hong
June 10, 2009
In parts of Southern California, the housing crash has upended a basic
tenet of the American dream: that home values always increase over the
long term.
Properties in several areas are selling for less than they did 20
years ago, and that's not even counting the effects of inflation.
The government is knowingly flooding the market with homes at inflated
prices, setting young families up for default and massively increasing
taxpayers' exposure to more toxic debt ... and for what?
It's all about taking care of the banking and finance industry.
Bush was responsible for widening the scope of FHA loans with his
"HOPE for Homeowners" program, pledging to make $300 billion available
for FHA-backed refinancing that would've helped 400,000 families avoid
foreclosure. But the program seemed to be more about coming up with a
legitimate reason for getting as many lenders approved to take part in
the racket as quickly as possible than actually helping people
refinance their homes.
Six months after HOPE was signed into law, only one homeowner had
successfully refinanced with the program. At the same time, the number
of FHA-approved lenders doubled from around 16,000 to 36,000. It was
perfect timing, as many of them were subprime lenders looking for a
new gig.
Here's Business Week again:
FHA "faces a tsunami" in the form of ex-subprime lenders who favor
aggressive sales tactics and sometimes engage in outright fraud, says
Kenneth M. Donohue Sr., the inspector general for the Department of
Housing and Urban Development. "I am very concerned that the same
players who brought us problems in the subprime area are now
reconstituting themselves and bringing loans into the FHA portfolio,"
he adds.
FHA staffing has remained roughly level over the past five years, at
just under 1,000 employees, even as that tsunami has been building,
Donohue points out. The FHA unit that approves new lenders,
recertifies existing ones and oversees quality assurance has only five
slots; two of those were vacant this fall, according to HUD's Web
site. Former housing officials say lender evaluations sometimes amount
to little more than a brief phone call, which helps explain why
questionable ex-subprime operations can reinvent themselves and gain
approval.
So here we are. Subprime 2.0. Just like the last subprime bubble, it
might help the economy in the short term; real-estate industry profits
will soar, developers will keep the construction business running,
banks will look more solvent and inspire confidence in the economy,
which will help keep the bubble inflated. But it won't last.
The second contraction will come, and when it does, it'll be bigger
and badder than ever. And the government bailout will come straight
out of our pensions and health care.