Wednesday, June 17, 2009

FHA Working Hard to Sell Some Condos

What to do about the glut of new condo developments around the country sitting half-empty, waiting for buyers to save them from the inevitability of foreclosure proceedings?  Rest assured that some sort of government bailout is the answer.  If a developer can get a building approved by FHA, then potential buyers can get a mortgage from an FHA-approved lender with only 3.5% down.  Tack on the $8,000 first time homebuyer credit and you can practically get a condo for free.  For a building to be approved by FHA, it must be 51% sold, so the developers have to do a bit of work to get to the threshold, but then, the condos should practically sell themselves.  Congress helped the cause by boosting FHA loan limits from $417,000 to $729,750, making virtually all condos eligible for FHA loan guarantees, except for all of the luxury buildings in Manhattan that are attempting to sell buildings full of units for $5 million a pop (I wish them luck.)  With Fannie and Freddie both tightening condo lending standards by requiring 70% of the units in the building to be sold, FHA is actually considering LOWERING its standards for approval, out of concern that the condo market is going to implode if somebody doesn't stop the madness.  I mean, really, how are developers supposed to sell all of this condo inventory that was conceived and built during an unsustainable condo-flipping frenzy at prices that nobody can or is willing to pay if the government isn't going to offer to insure no down-payment loans?  

The good news is that 93,000 condo units are scheduled for completion in 2009, a 28% increase over last year, according to Reis Inc.  So that should really help clear up the inventory problem.  Even better news is that nearly one-third of all first mortgages are now being originated through FHA, up from about 2% in 2006, when all of those highly successful subprime lenders, none of whom remain, were the leaders in the no down-payment mortgage game.  Best news of all, of course, is that delinquencies on FHA-backed loans rose to 7.5% in February from 6.2% a year earlier.  With unemployment rising and housing prices falling, delinquency rates will no doubt surge higher.

To be honest, at least FHA-backed loans are simple, fixed-rate mortgages that most people can comprehend.  They might not understand the math, but they can handle having to pay the same amount of money every month for the next 30 years.  We won't see the same leap in defaults once borrower's payments triple when their negative-am loans recast, because the payments won't change over time.  So hopefully the FHA program will help some who otherwise wouldn't have been able to purchase a home.  But let's hope that when the next housing bubble rolls around they don't screw it up with a cash-out refi.   

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