This is not good news. The Federal Housing Administration ("FHA") has lending programs for higher risk borrowers, which provide minimum 3.5% down payments and allow extremely low credit scores. FHA guaranteed loans to extremely marginal buyers in 2007 and 2008 (average credit scores of 633). 10% of 2007 FHA loans and 12% of 2008 FHA loans are seriously delinquent, meaning borrowers are more than three (3) months late on their payments. The FHA now has only 0.53% cash reserves, well below the 2% minimum required by Congress.
As a result: FHA is tightening lending standards. While this is a prudent fiscal move, as a public policy move it runs the risk of stopping the tentative housing recovery dead in its tracks. Right now first time buyers, who typically have less cash to put down and often lower credit scores, are the drivers of this housing recovery. They are just about the only folks buying right now.
Move up buyers aren't buying, they are sticking tight in hopes that they will recover some of the home value they have lost over the last two years. Investors' hands are tied, but for the few who have cash, because banks aren't lending money for acquisitions or development, which is unfortunate. Getting the undervalued distressed property - short sales and foreclosures - out of the housing inventory would allow for a stabilization of prices and a more robust, rapid and sustained housing recovery.
It's been a weird "glass half full or glass half empty?" kind of year, hasn't it? Good news followed by bad news. I'm going with a "glass half full" prediction. I predict that the next 6 weeks will be slow, until after the holidays and the New Year. I predict that January-March 2010 will be very busy, as first time home buyers rush to take advantage of the $8,000 tax credit.
Here's hoping I'm right!
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