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FHA Changes May Cause More Loans to Go Underwater



Mortgage Application

I first caught whiff of this in an Inman News article by Matt Carter.  Then I saw an editorial about it in The Washington Post. Then I heard a short piece on Marketplace Money from American Public Media on my local NPR station (you know how us liberals love our NPR).  So I know I wasn’t hallucinating.

It seems that the FHA is going have stricter guidelines, to wit:

  • raising the minimum down payment from 3.5% to 5%
  • raising the minimum FICO credit score to 620
  • raising both the upfront and ongoing mortgage insurance premiums
  • reduce maximum Seller contribution allowable from 6% to 3%

All this and more in the name of shoring up FHA reserves which are astonishingly low.  It seems that what used to be the lending program of last resort is taking a bath on continuing mortgage defaults.  Considering that the concept behind FHA is to provide financing for moderate income borrowers chasing the American Dream of of home ownership, it’s surprising that Congress won’t step up to the plate to bailout the FHA.

Mixed Message

On the one hand, we have the Government providing these really nice tax credits to encourage home ownership.  We have the Federal Reserve keeping mortgage interest rates low by massive buying of mortgage backed securities. We have everyone talking about the need for the housing industry to help lead the country out of the recession.  After all, when people buy homes, jobs are created or saved and a huge litany of businesses flourish to support it.  After all we are constantly being told that we need to spend, spend, spend in order to help the recovery.

The United States has moved from being an agricultural economy through the industrial/manufacturing economy into the service/information economy we now live in.  We don’t make much of anything anymore.  We do build houses and, as the saying goes, people gotta live somewhere. Yet, credit to buy houses remains exceedingly restrictive and, with this announcement from the FHA about it’s new guidelines, it is about to get a whole lot tighter.  What’s a spender to do?  Get another 60″ flat screen?

Mixed Feelings

To be honest, I know that a lot of the reason we’re in the mess now is that a lot of people bought a lot of houses with little or no money and no hopes of ever being able to keep up the monthly mortgage payment.  I get that. The sub-prime lending business that is now nearly extinct loaned money to anyone who could fog a mirror.

However, there are also a lot of good people out there with decent jobs that could probably afford the monthly nut, if they could just get the key to the front door.  We have turned so completely into a consumer economy that until the most recent economic meltdown we had a National savings rate in negative territory.  Now, both private lenders and the Federal Government are telling potential home buyers that they better have a pretty big wad of cash or it ain’t gonna happen for them.

I would love for everyone of my buyer clients to be “A paper” with a ton of money in the bank.  Gosh, wouldn’t negotiating a contract be a lot easier if my buyer client didn’t need closing help from the seller?  Wouldn’t it be wonderful if everyone had 20% for a down payment? 10%?  I’m into it.  If we could go back to the good ol’ days when people either saved and paid cash — all cash — for a house or had 20%+ to put down, it’d be great.  And home prices would be in the low double digits.

So, for now, it looks like the buyer pool is going to shrink again. Of course, that means home prices are going to have to come down some more.  Maybe a lot more. That means a lot more home owners who might have otherwise sold their homes with their head held high and credit intact are going to be underwater.

But, hey, if this was easy, anyone could do it.

“Loves sunrise walks on the beach, quaint B & Bs, former Barbie® boyfriend..." Ken is a sole practitioner and Realtor Extraordinaire in the beautiful MD Suburbs of DC. When he's not spouting off on Agent Genius he holds court from his home office in Glenn Dale, MD or the office for RE/MAX Advantage Realty in Fulton, MD...and always on the MD Suburbs of DC Blog

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  1. Ken Brand

    December 6, 2009 at 9:38 am

    I understand that things need to be done. But, it reminds me of spending the night in an unfamiliar hotel. When I go to take a shower, there’s an unfamiliar lag in the hot water. So what do I do? I twist it one and nothing happens, so I crank it up, suddenly I’m scalding….I wrench the other way, nothing happens….I twist it further, then, it’s freezing. I yelp and cranking it back — nothing…then….. You get the picture, eventually I figure it out, but in the mean time it’s a wild swing between scald and shrinkage. Sadly.


  2. David Gibbons

    December 6, 2009 at 3:57 pm


    I understand how, on the face of it, you’d draw these conclusions based on slightly tighter lending guidelines for purchases. To understand this however, you need to look at the full FHA picture and include an analysis of what’s happened on the refinance side of the house. With refi’s through the HARP initiative the FHA is moving in the opposite direction and Fannie & Freddie’s borrowers can now refinance into today’s super-low rates up to 125%. This re-balancing of procurement vs refinance costs at the FHA merely indicates that the Treasury is learning that we need to stop the bleeding (i.e. foreclosures) before we can start the healing (i.e. renewed demand for housing.) I LOVE to see this happening; the Feds are learning from past mistakes and making sustainable improvements in government sponsored lending. It’s good long-term thinking.

    The reset also indicates a mature approach to no longer artificially propping up the housing market. Mortgage rates are so low right now that fools would rush in just like they did when appreciation was so badly out of line if money was too easy to come by. Tightening purchase loan requirements will simply help keep (some) foolish speculative demand out of the market and as we’ve learnt, that can only be a good thing.

  3. Jeff Linroth

    December 7, 2009 at 5:20 am

    Well said David Gibbons! I can think of precious little to add. One very big positive is happening right now. The savings rate is now above 5%. If we can just continue to be patient, it will not be long before folks have amassed the significant down payment they need – just like the good old days!

    Jeff L

    • Ken Montville

      December 7, 2009 at 11:17 am

      Hey, Jeff. It’s good to see you here on AG.

      Now, about the new FHA guidelines. Sure it’s great everyone is saving money but what about jobs and the economy in general. I’ve been told time and time again that the housing market will lead the country out of the recession. You know, carpenters, electricians, construction workers of all kinds, Home Depot, furniture stores, landscapers, etc. All these folks need money, too, and they, supposedly, in turn will buy a house as a part of the American Dream which, in turn, will create stable neighborhoods, involved parents in schools, etc.


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The House Judiciary antitrust investigation holds big techs’ feet to the fire

(POLITICS) CEOs of Alphabet, Facebook, Apple, and Amazon set to testify in House Judiciary Committee antitrust investigation hearing today.



house investigation

The House Judiciary Committee is closing in on the end of a year-long investigation into tech giants Google, Facebook, Apple, and Amazon, to evaluate possible antitrust abuses. CEOs from all four companies were set to testify on Monday, July 27, 2020. The hearing has been pushed back to Wednesday, July 29, to allow members of Congress to pay respects to civil rights leader Representative John Lewis (D-GA) who died of pancreatic cancer on July 17.

Jeff Bezos of Amazon, Tim Cook of Apple, Mark Zuckerberg of Facebook, and Sundar Pichai of Alphabet (Google’s parent company) have all agreed to testify. This will be Bezos’ first time in front of Congress, whereas all the others have testified before on different matters. Twitter CEO Jack Dorsey was invited to testify by Representative Jim Jordan (R-OH), but is expected to not attend.

The Antitrust Subcommittee began the investigation in June 2019. Each business has been the subject of scrutiny for their roles in dominating their respective industries and playing an outsized role in market competition for smaller businesses. The Committee is interested in evaluating current antitrust laws and whether they apply to, or should be updated for, these mega corporations. They have already heard testimonies from smaller companies like Sonos and Tile about these companies’ alleged monopolistic practices.

The focus of the investigation for Apple is on the App Store, and whether it has implemented policies that are harmful for app developers. Google has a tight hold on the online advertising market. Amazon – which during a five-week period early in the pandemic saw an increase in value equivalent to the total value of Walmart, the world’s largest firm – has been criticized for its treatment of brands that sell on its e-commerce platform. Facebook is being investigated for its acquisition practices, cornering the social media market with purchases like Instagram.

Amazon is expected to face additional scrutiny for its treatment of warehouse workers during the pandemic. Facebook and YouTube (a subsidiary of Google) have been the subject of regular criticism about monitoring hate speech on their platforms, and their treatment of the workers responsible for doing so (Facebook in particular).

The hearing is set to occur virtually in order to adhere to social distancing guidelines. Watch the hearing live at 12:00 p.m. EST Wednesday, July 29 on the House Judiciary Committee’s YouTube channel. Please do note the hilarious irony of streaming a Congressional antitrust hearing on YouTube, which is owned by Google, which is owned by Alphabet, which is testifying at said hearing. God Bless America.

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Additional unemployment benefits outside of the CARES Act

(POLITICS) Unemployment is at an all time high in the United States and individuals need to be aware of reapplying for additional benefits.



unemployment broke

June saw some additional jobs in the US and unemployment fell as of early July, but CNBC advised pausing on any celebration just yet, saying that “The employment crisis is still worse than any time since the Great Depression, the country’s worst economic downturn in its industrial history.”

The unemployment statistics in our country right now are really scary – especially for individuals and families that see a looming deadline of July 31 for the supplemental $600/week provided by the Federal Government through the CARES Act put in place in March. There are discussions on extending these benefits as many families have not been able to replace their incomes or find new employment opportunities, but it doesn’t seem like anything has been finalized there yet. Congress is in the middle of a variety of options:

  • Discontinue the additional $600/week but allow those on unemployment to continue to file and receive their state benefits (usually up to 26 weeks or possibly extended up to 39 weeks by The CARES act)
  • Send out additional stimulus checks (Congress is currently exploring a $X Trillion stimulus package)
  • Extend the additional funding (on top of the weekly amount allotted by state) but cut it from $600 to $200
  • It’s also been put on the table in the House of Representatives “The Heroes Act” to extend the additional $600/week until January 2021 ($3 trillion).

There are some additional benefits that are available (different than the funds by the CARES Act), but you may have to reapply for them. So, make sure to check your state’s unemployment pages and your filing status. Some states do not require you to reapply and you can continue on with extended benefits.

According to CNBC, “The additional aid expires after the end of the year. (This is a different program than the one paying an extra $600 a week through July 31.) For some reason, the [Department of Labor] has taken the position that people have to file for the additional PEUC benefits,” said Michele Evermore, a senior policy analyst at the National Employment Law Project.”

No doubt that this can cause additional stress and uncertainty especially when you have questions about your filing and are unable to get through to someone on the phone. With the way that the unemployment cycle is setup, technically July 25 is considered the last date for that cycle (and July 26 for New York), so be sure to check and see what the next steps are for you if you are currently filing.

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How will pausing the reopening of states impact the recovery of the economy?

(POLITICS) The resurgence of COVID-19 has left Americans with a lot of questions about our nation’s economic future. That ambiguity is seemingly a feature, not a bug.



COVID-19 reopening economy

The rest of the world watched as the United States dramatically reopened “the economy” last month. Now, it seems we’ve changed our minds about that.

The White House has repeatedly said that it will be up to individual states to form their own pandemic response plans moving forward. But letting local governments devise their own solutions has produced large gaps in their preparedness, as well as profound confusion around the best practices for balancing the country’s public and economic health.

California, which represents the largest economy in the US and the fifth largest in the world, was one of the first states to put serious quarantine restrictions in place. The decision to relax those orders only came after anti-lockdown protestors demanded that Governor Gavin Newsom reopen the state’s beaches, businesses and churches. Newsom may now regret this capitulation as California just called for a second round of statewide lockdowns.

Other state legislators are slowly following their lead, as the threat is becoming very dire in some places. Florida, for instance, is now a global hotspot for COVID-19 and Miami is being called “the new Wuhan”. The state is also currently struggling against another wave of unemployment, partly because their economy is heavily dependent on summer tourism (which has persisted despite the spike in cases, but not nearly at pre-pandemic levels).

Florida, California and Texas are altogether responsible for 20 percent of all new COVID-19 cases globally.

Every state is fighting two battles here. Coronavirus relief efforts in the US are still seriously underfunded, and most health organizations here lack the resources to effectively test and treat their communities. But the problems that have emerged for workers and small business owners, like evictions and layoffs, have also been devastating in their own right.

In essence, the United States reopened in an effort to curb the nation’s financial freefall and ballooning unemployment. Economists predicted at the beginning of July that reopening would allow the US to avoid a recession, and all would go smoothly. These projections likely did not account for a spike in cases that would halt this economic rebound.

That’s not to say the circumstances here haven’t improved at all over the past months; currently there is no acute shortage of ventilators, and doctors have had some time to refine their strategies for treating the virus. Overall, the national unemployment rate is slightly declining, while working from home is going so well for companies like Twitter and Facebook that they will be permanently switching much of their staff to remote work.

By comparison, though, New Zealand took the pandemic much more seriously than the US did, and they are objectively in a better position now in all respects. Prime Minister Jacinda Ardern cracked down hard and early, closing the country’s borders completely, and instituting rent freezes nationwide. As a result they have virtually eradicated COVID-19 within their borders. A report from S&P Global also expects New Zealand’s economy to recover quickly compared to the rest of the world.

While this tradeoff seems like a zero sum game – as if we have to pick either our health, or our wealth – it is not. In fact, we could very well end up with neither if our lawmakers don’t proceed with caution.

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