Market Conditions: Crain’s: Foreclosure Rate On FHA Loans In Chicago Soars
Crain’s is reporting that the foreclosure rate on FHA loans in Chicago is much higher than the national rate and is the highest of any metro area in the country.
Not only that, but many of the loans that are going bad are those that were given out AFTER the bust had already started (i.e. 2008-2009).
In the Chicago area, 9,067, or 6.26 percent of all FHA-insured loans issued since 2008 are now facing foreclosure, compared to a 2.07 percent foreclosure rate for all other loans issued here over the same period, according to a Crain’s analysis of data provided by Irvine, Calif.-based RealtyTrac Inc.
According to RealtyTrac, 16.7 percent of local FHA-insured loans issued in 2008 are now facing foreclosure, more than double the rate of other local loans issued that year.
2009 doesn’t look so hot either with what looks like about 9% of the FHA loans facing foreclosure compared to just about 2% of all loans.
Does the 3.5% downpayment requirement have anything to do with so many FHA loans going bad?
The FHA doesn’t loan money but instead collects premiums and insures mortgages for borrowers who often have limited financing options. FHA loans can be riskier than conventional mortgages because homeowners who use them often put down as little as 3.5 percent of their purchase price, well below the 15 percent to 20 percent that many non-FHA lenders require.
The agency expanded its efforts after the subprime lending crisis tightened credit and upended mortgage giants Fannie Mae and Freddie Mac, which were placed in the conservatorship of the federal government in 2008 after sustaining huge losses from distressed mortgages.
“(The FHA) took on a lot of borrowers the program was really not intended for and those borrowers took advantage of that situation to get into homes they really couldn’t afford,” said RealtyTrac vice-president Daren Blomquist. “The FHA programs did not adjust quickly enough based on the lessons that should have been learned from the subprime lending fallout.”
The FHA’s track record in the Chicago area is horrible over the last 12 years.
In fact, the Chicago area has the highest percentage of distressed FHA loans of any other metro area, with an 8 percent foreclosure rate on such loans issued since 2000, according to RealtyTrac. About 43.8 percent of Chicago-area residential loans issued since 2008 and now facing foreclosure are FHA-insured.
What’s the solution here?
Should the FHA be scaled sharply back?
Foreclosure much more likely here for FHA loans [Crain’s Chicago Business, David Lee Matthews, December 11, 2012]
Why are we not surprised to hear all this?
However, I believe that the steep DTI ratios are the major factor in these defaults. While I will agree that no down loans are much more likely to default, FHA and VA loans have been made for decades with little or no down with decent results. What happened in the past 10-15 years to make these loans so much more likely to default than in previous decades? I would say that raising the DTI ratio and lending to people with poor credit histories were the most important factors.
The 2009-2010 vintage FHA loans are the worst-performing. No surprise that these were loans made during the time of the $8000 housing credit, which borrowers could “monetize” as the down payment in some cases. Loans were typically 4X the borrower’s income, and worse, the loans were often ARMs.
I didn’t know that the FHA offered ARM loans until I actually was offered one, with ridiculously low payments for the 3-year entry period, that would of course adjust much higher at the end of it, which would be about now for loans written 2009. The loan was for an amount of money I could not afford with a 30-year-fixed mortgage because the payments would be too high. You had to know that these loans were about guaranteed to default since they were made to buyers who could barely cut the low payments plus taxes, HOAs, and utilities, during the entry period.
It’s not just the down payments but the subsequent drop in home values during 2009-2010. Few conventional loans were being made so FHA was the only game in town as home values dropped leaving FHA buyers underwater.
“that would of course adjust much higher at the end of it, which would be about now for loans written 2009”
The reference rate for an ARM has not gone up since ’09. Any adjustment would be *down*.
“What happened in the past 10-15 years to make these loans so much more likely to default than in previous decades? ”
It was the drop in home prices during the 2009-2010 period, during which few conventional loans were being made, that is the source of the FHA defaults. I’ve seen quite few FHA buyers during that time period come through my office and they’re really underwater even though most can afford the loan. (Didn’t SOnies buy in 2009-2010 with a FHA loan?)
Which brings me to discuss two stupid stupid old adages 1) “when everyone is selling, you should be buying” – well, that perfectly describes 2009-2010. Everyone was selling, few were buying, and most of those idiots buying were with FHA loans and now they’re all underwater and 2) “buy when there is blood in the streets” again, this describes 2009-2010, lots of blood everywhere as prices had begun to fall, and those who were out in the stream of blood quickly got covered in it as prices began to fall.
Ha!
“Few conventional loans were being made so FHA was the only game in town as home values dropped leaving FHA buyers underwater.”
Who cares if you’re underwater if you just bought 3 years ago? EVERYONE who bought 3 years ago is underwater. They’re not all defaulting.
It’s more than just being underwater. Why are some defaulting in 2011 and 2012. How could you get a mortgage and already be in default 6 months later? I understand this was more common place in 2005-2006 because of fraud- but in 2012?
Defaulting has become norm now. There is little stigma associated with it, so when these people want to get out, they probably figure, why not just default?
“Which brings me to discuss two stupid stupid old adages 1) “when everyone is selling, you should be buying” – well, that perfectly describes 2009-2010. Everyone was selling, few were buying, and most of those idiots buying were with FHA loans and now they’re all underwater and 2) “buy when there is blood in the streets” again, this describes 2009-2010, lots of blood everywhere as prices had begun to fall, and those who were out in the stream of blood quickly got covered in it as prices began to fall.”
These are sayings meant for investing. Average homebuyers are not investors and typically buy/sell during life events. Smart investors did follow these adages and have succeeded. I don’t follow large scale projects or condos, but spec home builders and flippers are doing quite well as a result of the bust.
The issue with FHA loans is not the 3.5% down, but the fact all the OTHER underwriting criteria are so lax as well. Low down payments by themselves do not cause foreclosures. So not only do some FHA borrowers have the low down payment, they also have crappy credit histories, spotty income, high debt ratios, and no reserves. In short, some of the FHA buyers that have defaulted so recently were basically a broken furnace away from a foreclosure from the start.
2008/2009 FHA was pretty much the only game in town for less than 10% down in Chicago as most of the conventional PMI companies had overlays on Chicago in regards to max loan to values, particularly on condos. They have since been removed so 5% down conventional is possible with good credit now though.
FHA has a place, but they really need to raise minimum FICO scores, lower DTI requirements, and put more emphasis on post closing reserves. If someone wants 3.5% down, they should at least be required to have a > 700 FICO score and 6 months of cash reserves with a DTI not higher than 40%.
I suspect a lot of the early FHA defaults are victims of the economy more than anything. Remember, a lot of these people are already living paycheck to paycheck and usually don’t have a ton of reserves. So getting laid off or having to take a pay cut throws their lives upside down.
What the hell do you expect? The government decides to promote home ownership at all costs so this is the cost. Surprise, surprise.
Just local anecdotal info…for the Rogers Park / Edgewater hoodies…I’m seeing listings (low end < $125) go OFF market then come back on $10K higher….wassup with that?
I bought in 2010 – (not with FHA though) – am quite happy with the price I paid, am not underwater and have no desire to sell.
Me too Milkster, though I bought (and sold) in 2011.
Imagine the increase in foreclosures if the gov removes the home loan interest tax deduction.
Hi Vlajos –
I remember.
You’re my Andersonville homie!
I bought in 2010, 2011 and 2012.
Would like to buy again, but the pickins are slim.
That’s right Milkster!
I bought with FHA in 09, thankfully I was able to HAMP refinance at a real low rate, they really should move the date further back than June 09 since most places have still declined in value since then and it would certainly slow the forclosures at least a little bit and free up some income for the less fortunate people that closed in say July 2009 or later
As for the downpayment requirements, I don’t think thats a huge issue until selling time, I’d say that the way these mortgages are underwritten, low credit scores, high income, and no savings is fine, where liquid assets should be the biggest factor rather than income and ridiculous DTI ratio requirements. You shouldn’t be able to go more than 3x your income with any loan especially one that requires 3.5% down. Number of children, cars, travel expenses and other things should be taken into consideration before writing such loans, but they aren’t, the underwriters just put all the info the fannie wants into a box and crap out a loan.
“anon (tfo) (December 12, 2012, 7:08 am)
“that would of course adjust much higher at the end of it, which would be about now for loans written 2009?
The reference rate for an ARM has not gone up since ’09. Any adjustment would be *down*.”
I don’t know if this is the case for FHA ARMs but ARMs sometimes have a “teaser” rate that is significantly lower than the normalized spread to treasuries that kicks in after the first reset. So even though treasury rates are lower the reset rates could still be considerably higher.
“I don’t know if this is the case for FHA ARMs but ARMs sometimes have a “teaser” rate that is significantly lower than the normalized spread to treasuries that kicks in after the first reset. So even though treasury rates are lower the reset rates could still be considerably higher.”
The “Rate Break”. Which currently is (a) 1% rate reduction (ie 2.25, instead of 3.25) for first year, only, and (b) used with fixed rate loans. Maybe they were offering something difference 3 years ago.
I cannot imagine taking a loan for 3x my household income. Yikes.
People who can afford to keep their homes are allowing the bank for foreclose. The low down payment seems like an issue to me because the owners have very little reason to not to just let the bank foreclose. They buy second houses and then let the bank foreclose on the first. For them, there is very little to lose. A higher down payment might make them think twice before allowing the bank to foreclose.
Sonies, consideration of disposable income is one reason why VA loans perform better than almost any other loan product evne though most VA loans are 100% financed. VA looks at child care expenses, etc in the debt ratios. Conventional/FHA don’t consider it. You can have someone with a 30% DTI on paper which is lower than average, but if you were to factor in the monthly day care expense which doesn’t show up on credit report, it really would be say 50%. Underwriting also does not consider maintenance costs on single family homes.
The secondary market for mortgages does not allow much room for common sense underwriting at the individual borrower level anymore. The use of FICO scores, selling mortgages, legal liability, government intrusion, all contribute to this “fit in the box” mentality with no way to really just use some common sense. Banks don’t want to be accused of discrimination if they deny someone a loan, nor do they want the legal scum pushing liability back on them when loans do go bad.
Loans go bad, the first thing that happens is the file is audited to make sure that someone didn’t use blue ink instead of black to push the liability back on someone else when 99% of the time the loan is in foreclosure because the borrower simply lost a job. No one can predict that…
“Sonies, consideration of disposable income is one reason why VA loans perform better than almost any other loan product evne though most VA loans are 100% financed. VA looks at child care expenses, etc in the debt ratios. Conventional/FHA don’t consider it. You can have someone with a 30% DTI on paper which is lower than average, but if you were to factor in the monthly day care expense which doesn’t show up on credit report, it really would be say 50%. Underwriting also does not consider maintenance costs on single family homes.”
exactly, theres a hell of a lot of stuff that doesn’t show up on your credit report and are pretty major monthly expenses for most people… only time paying for this crap shows up is usually only if you’re 60+ days late
Cell phone bills
Utility bills
Cable Bills
Gas/car maintenance
Groceries
Insurance Costs (life, health, accident, home, car, etc.)
Child Care
Pet Care
Personal Care (are you getting your nails done weekly, or expensive hairdoos, etc.)
Gym memberships
This sort of crap could add up to a significant amount of money that isn’t counted in your DTI ratios nor underwriting (to my knowledge) and for those people who have zero savings other than their down payment, like Russ said, are one furnace breaking down away from total economic collapse and BK
But on the other side of the spectrum, someone with a good steady job, no debt, no car, no dependents, and good savings shouldn’t be denied a loan because “that sounds like a lot.” A young single professional who makes $75k/yr, has $40k in the bank, and meets the above criteria should be allowed to borrow more than $225k. The PITIA on $225k would still be less then renting a one bed at Flair/EnV, etc.
Good point Fred
mh, your reluctance to borrow 3x your household income is why you’d probably be a good credit risk — and therefore eligible for a loan 4x your income, maybe more, if the risk can somehow be shifted to the GSEs.
“I cannot imagine taking a loan for 3x my household income. Yikes.”
Anon, these ARM mortgages would NOT adjust down but up, regardless of lower interest rates, because so much interest AND principal are deferred during the 3-year “entry” period that payments have to adjust sharply upward to pay all the deferred principal and accrued interest, which was of course compounding during the entry period. This is why ARM loans are such nasty traps, especially for moderate income people who need not expect any upward mobility and are financially more insecure than ever.
Yes, FHA should be scaled back considerably. More than that, the only loan product offered should be a fixed rate loan, the shorter the term the better, and the maximum DTI should be 2.5, which was standard before 1975 for all home loans, even though buyers in those times had more savings and carried far less consumer debt as a percentage of their incomes. Given that many buyers these days come to home ownership already buckling under the burden of multiple car loans, epic credit card debt, and absolutely monstrous student loans, an even lower DTI ratio might be in order.
But THAT would crush the next housing bubble all the buried home buyers of the last decade are praying for, and wouldn’t that be just terrible?
“Anon, these ARM mortgages would NOT adjust down but up, regardless of lower interest rates, because so much interest AND principal are deferred during the 3-year “entry” period that payments have to adjust sharply upward to pay all the deferred principal and accrued interest, which was of course compounding during the entry period. ”
That’s an option ARM loan and I don’t have any reason to beleive that FHA *ever* offered OARMs. So, please provide a cite.
I believe Laura is referring to FHA’s graduated payment program. Basically, they give you a lower payment to start and then increase it each year thereafter. It isn’t an ARM in the traditional sense, but the payments are held artificially low initially and then increased to a preset level over the course of a several years. It is a program designed for low/moderate incomes who expect their incomes to increase over the years. It isn’t a really common program that is used these days. Otherwise, Anon is correct, any arm would actually be adjusting lower these days, not higher.
Obviously some really poor underwriting but the Chicago market still has a ways to drop and then it will stagnate for a decade, in the meantime your getting your brains taxed out. In VA the low down payment allows people who don’t have enough skin in the game to walk away from a depreciating or stagnating home value with less personal impact. If you put 60K on a 300K house and your underwater, you will likely stay in the house, because even though your 60K is gone, its harder to understand that, and your likely underwater by an amount smaller than your DP, so they stay in a bad investment. If you put down 10K, and you have a 290K mortgage on a place bought for 300K now worth 255K, emotionally, its much easier to see your throwing money away by continuing to pay your note, taxes and maintenance. You can rent, although I don’t see how people would default on a VA note and then be able to buy again, I think thats very unlikely. They are just opting to rent.
My “cite” is a building located in the 1600 block W North Shore in Rogers Park. It’s a rather fugly 24-unit courtyard that was gut-rehabbed and put on the market in 2009, when I was strolling by and decided to take a look in on the Open House unit.
$199K for a tiny 4 room 2bed 2bath, while 5 room rehabs in the same area, on better streets and better blocks, were already falling into the $130K to $140K range. But the financing was a DEAL, ‘cuz you could buy these beauties for 3.5% down, with a $699 a month payment. The agent fell all over me. It’s FHA approved he said, and the financing offered was FHA. An ARM with a 3 year entry period which would have a huge balloon at the end of the entry period, but, hey, don’t worry you can always refinance.
Can I refinance if the place is worth 35% less than the amount of the loan, I asked. He said, well no, but the housing market would recover by then.
And this is really a FHA loan, I pressed. Yes indeed it was. You could get a fixed, too, but the developer was promoting these FHA ARM loans to entice buyers with the low monthly break-in payments.
” $199k … 3.5% down, with a $699 a month payment”
Sounds like the Rate Break. There isnt “deferred” interest or principal, just an initially lower interest rate. $190k at 2% is about $700 as a fully amortizing payment–and currently, advertised fha 5/1 arms are at 2.25, so a point off would make for an even lower payment during the break period.
While Sonies & Russ might be right regarding why the DP % might not be the largest factor in defaults, it must be recognized that FHA loan downpayment loans are helping keep house valuations aloft. When one can “buy” a place with little more than a rental deposit, these people impact valuations.
I can only hope the limits are scaled back at the end of 2013 as they are supposed to, but we’ve been down this road before–people want their 400k houses with 18k down in Chicago.