The problems of federal 'help' in housing

Looking at Steve Chapman's article at Reason on Mortgage Madness (Via Insty) there are a few interesting things that come to light.

First is that in this housing downturn the FHA often requires only 3.5% down on a mortgage, which means the lender is on hook for the rest.  This in a market where commercial lenders are now wanting 20% down due to the number of foreclosures and people who default on their repayments.

Second is that the FHA now makes four times as many loans as it did during the height of the stock market bubble.  And their foreclosure rate is climbing... meaning that they are going to 'need' another bailout right quick.

Third is that this lending by FHA is being done on their cash reserve of $30 billion in a bet that housing prices will not fall.

Fourth, as pointed out in the comments, the government now has an $8,000  first time buyer bonus tax credit which means you get to write off $8,000 in the purchase of a new home.

The net result?

Well, think of that $8,000 as the 3.5%, although it is actually less due to fees, etc. consider it a 'ball park estimate'.

That makes the 100% that you can get in the way of a home in the $228,000 range.

Turn and sell that home for anything almost immediately and you stand a good chance of making money on the deal as your first $8,000 is repaid via taxes and even a small amount of yield can pay for the paperwork of the original purchase and the resale, leaving a good sized net yield.

Free money!

If you can get it, that is.

Now we had all better hope it doesn't actually work that way.

Because the bet is that people will actually be able to get MORE for their homes, while the last three years has seen the market decline due to previous easy lending from the FHA and rules and regulations from the Community Reinvestment Act that pushed private lenders to accept more 'local' loans from people with poor ability to pay them back.  What you would expect is that no one will pay for even the cost of those homes and that these first time buyers will take their tax credit and then default if they can't pay for their mortgage and would be unwilling to throw good money after bad by having paid more for a home in a declining home value market.

Which is what we have now.

Thus the reason people unable to get 20% down flock to the FHA.

Which is drawing on its reserves.

Which is seeing its default rate climb (these are Non-Performing Loans of the over 90 days past due type that are indicative of a shaky market).

Which means it will want another bailout.

To lend more to those unable to get a commercial loan.

And that starts the process all over again.

Then the amount we have to pay out on bonds will go up as people see the US as a bad place to invest since we will be inflating our currency to try and pay off this debt at a lower cost.

Mind you, the swell folks Upon The Hill are going to re-authorize the CRA to pressure more commercial banks to follow this routine.

The regulations have not worked as intended.  The regulators are not exercising good fiscal judgment based on politically backed laws that require these things.  And the commercial sector is trying its hardest to keep bad loans from getting into the market to stabilize it, but those lovely laws and regulations will increase the pressure to do otherwise.

I'm sure that will help us no end as the government seeks to inflate the housing bubble with tax dollars and debt at the National level.

All for that lovely government 'help'.

Not from Wall Street does this corruption come but DC.

'By the pricking of my thumbs,

Something wicked this way comes.'

- William Shakespear, Macbeth.