Long but good video & article on how FHA has propped up parts of the RE market since CV

Expanded forbearance came about due to Covid but HUD has used it (abused it if we are being honest) to artificially prop up parts of the market. VA has also done this and has practically halted all foreclosures, trapping people in forbearance. And now, Liz Warren wants to use her CFPB agency to expand this to more than just HUD-backed loans, forcing banks to trap people in forbearance even on conventional loans.

This is a large reason as to why prices keep pushing higher, and despite all of the indicators pointing towards a correction, one hasn't happened yet.






This guy is a little extreme in calling it the Subprime bubble 2.0 IMO but in his defense, some if it does feel that way.

Some similarities is we have loosened lending restrictions. Not to the extremes of the subprime bust but not far off

Examples:

FHA allows credit scores as low as 580 to qualify with as little as 3.5% down.

FHA also allows credit scores as low as 500 to qualify with a 10% down payment.

FHA has loans that allow 30% of income from a roommate who pays rent to be counted towards DTI, and they also have a program for Non-Occupant Co-Borrowers to qualify and their income be considered for the loan.

Fannie Mae's HomeReady program allows household income from non-borrowing members living in the home to be considered for DTI calculations.

Also, 17% of FHA loans from 2022 are already in default. In 2022 FHA increased loan limits. I bet more people than ever are capping out at the 43% DTI max and this allowed people to buy more than they could afford, much like the subprime fiasco.

I am curious to see if HUD under Trump will try to navigate this or keep kicking the can down the road. Most of these homes will be coming out of forbearance this year, meaning they have to sell or start making payments again. That or face foreclosure.

quote:

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Why do housing prices keep climbing despite higher interest rates? The federal government has allowed borrowers to take out bigger mortgages than they can afford. To prevent foreclosures, it’s bailing them out when they miss payments. Behold another subprime housing bubble.

The problems began when the Obama administration eased underwriting standards by enabling more home buyers whose debt payments exceed 43% of income to qualify for government-backed loans. Such borrowers are risky because they might not be able to make payments if their income drops or expenses rise.

As home prices climbed, the Federal Housing Administration insured more loans to financially stretched borrowers with as little 3.5% down. No skin off lenders’ backs if borrowers later defaulted, since the mortgages were backed by the government.

In 2007, 35% of new FHA borrowers had debt-to-income ratios above 43%. By 2020, 54% did. As housing prices and inflation surged, borrowers became more stretched. The FHA kept insuring mortgages to borrowers who were increasingly leveraged. About 64% of FHA borrowers last year exceeded the 43% threshold.

The FHA loan portfolio is far riskier than it was before the 2008 housing crisis. The American Enterprise Institute’s Ed Pinto and Tobias Peter estimate that 79% of FHA first-time borrowers have a month or less in financial reserves—not enough to make mortgage payments if their household expenses rise, as most have owing to inflation.

No surprise, many are missing payments, especially recent borrowers. About 7.05% of FHA mortgages issued last year went seriously delinquent—90 or more days past when a payment is due—within 12 months. That’s more than at the 2008 peak of the subprime bubble (7.02%).

Under the guise of Covid relief, the Biden administration masked the growing troubles in the housing market by paying off borrowers and mortgage servicers to prevent foreclosures. Of the 52,531 FHA loans last year that went seriously delinquent within their first year, only nine resulted in foreclosure.

The FHA instituted a program that pays mortgage servicers to make borrowers’ missed payments for them. Missed payments are added to the loan’s principal, but without interest. The FHA also pays servicers to cut monthly payments for delinquent borrowers by 25% for three years, with the payment reductions also added to the principal without interest.

Consider a borrower who misses five $4,000 monthly mortgage payments. The servicer will add the $20,000 in missed payments to the mortgage and reduce monthly payments by $1,000 for three years—adding another $36,000 to their mortgage. So the borrower is $56,000 deeper in debt, though with no additional interest. If he misses payments again, the servicer rinses and repeats, getting paid $1,750 every time it lathers up. The FHA also lets servicers charge borrowers legal fees—typically several thousand dollars—that are added to the mortgage principal.

The FHA made 556,841 “incentive payments” to servicers over the past year to prevent foreclosures—nearly as many as the new mortgages it insured. Government-backed mortgage relief has become a cash cow for servicers, some of which originated the risky loans they are paid not to foreclose. Moral hazard, anyone?

One result is that many FHA borrowers owe more than their original mortgage and more than their homes are worth. They are essentially trapped in their homes even if they want to sell and move.

Another result is that home prices keep increasing because borrowers who don’t pay their mortgages—and never should have qualified for loans—can’t get foreclosed on or be forced to sell their homes. Getting foreclosed on these days is like flunking out of college—it takes effort. You have to reject repeated offers for mortgage relief.

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WSJ Article



TLDR or TLDW version is that Biden has directed HUD to kick the can down the road so a correction didn't happen on his watch and in exchange we have an artificially inflated RE market