Government Housing Programs

by Larry Levin


In the middle of August I wrote a piece that included how the government was picking up where the banks left off: subprime lending. In it I said "With this backdrop, only the government could be stupid enough to ignore the recent past - the recent blow up in the housing sector. Well, the idiots in Congress have forgotten and the government is making like it never happened; as if Freddie Mac, Fannie Mae, Bear Stearns, Countrywide, Wachovia, Lehman Brothers, Indy Mac, Shitibank, Merrill Lynch, AIG and others never went bankrupt or weren't saved by your tax dollars. Huh, that's weird - I thought this all happened?

"Now the government wants to INCREASE your risk by turning Ginnie Mae and the FHA into the next Fannie Mae, et al.

"Please consider the full article The Next Fannie Mae by the Wall Street Journal. In that article, part of it read 'Herein lies the problem. The FHA's standard insurance program today is notoriously lax. It backs low down payment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending-the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.'"

In case you wanted more proof, or an update on how the government's housing roulette game is going, here it is: BADLY!

The following is from Karl Denninger...

It is time to call "BS" on the so-called "reform" in the mortgage lending industry, along with the government's "progress" in this regard.

The current FHA report is now out for servicing delinquencies and defaults, and as expected it is indeed worse, not better. The administration continues to LIE about claimed "improvements" in the character of home finance.

22.9% of all FHA loans are either delinquent or in foreclosure.

Let's see - 30 days are up, 60 days are up, 90+ days are up, default+foreclosure is up and 60+ including foreclosures are of course up.

Improvement? Where? This is current as of August now and the internals continue to deteriorate.

Why? Try this on for size:

http://market-ticker.denninger.net/uploads/Charts2009-09/Ginnie.png

This is directly from HUD's web site, which links to a Ginnie Mae calculator for an FHA loan. Assumptions were $50,000 annual income, married, 2 dependents in San Francisco, no declared reserves, one car with a $300 payment monthly, approximately $5,000 in credit card debt at a 5% minimum payment and $100 in additional monthly debt payments (e.g. student loans, etc.)

A lower-income person in California.

Ginnie claims that this person can spend 36% of their gross income on housing, or the front-end ratio (they also include $342 monthly for other housing-related costs, presumably homeowners insurance and utilities) and 49% of gross income on housing and all other mandatory debt service, or a 49% DTI.

This is preposterous. Such a loan will leave this couple with $1800 in monthly income - pretax!

Now let's take out the required FICA + Medicare tax and $322.91 comes out off the top monthly. This leaves you with under $1,500 monthly.

From this you must pay:

Federal and state income taxes
Car registration and insurance
Child care for those two dependents
Food
All other employment-related expenses (transportation, whether in your vehicle or mass transit, uniforms or clothing as required, etc.)
Health insurance contributions (if covered under an employee plan) along with all co-pays and other non-reimbursed expenses.
Retirement contributions (401k/IRA)
and on and on and on.

A family of four on $1,500 a month for everything other than the house eh? Yes, this might work - if you don't make any retirement contribution, you never get sick, you don't lose your job and are unable to find a new one for even one week, your car does not break down and your "great housing opportunity" doesn't require a roof, a furnace, or a water heater.

This much is certain - you won't be saving anything for a rainy-day fund, you won't be paying for child care, and if any of the ordinary calamities that hit families from time to time (see the above for a partial list) hit your family you will almost certainly fall behind on your house payment.

Since you have no extra earnings capacity or slack in your budget once that happens you're doomed - there is essentially no chance you can catch up which means you will wind up foreclosed upon.

This is exactly the sort of BS "lending" that went on during the housing bubble; while it is SOMEWHAT-less egregious than the "OptionARM" games the fact remains that under any sort of actual underwriting standard where CAPACITY is evaluated this loan is manifestly unsound and, on the objective evidence, should be considered PREDATORY.

Yet this is what our government is willing to underwrite and issue a formal federal full-faith-and-credit guarantee upon.

Oh, and the real topper? The $6,190 you need to come up with at closing could be entirely monetized from the $8,000 "first time future-foreclosure-victim tax credit", meaning that you don't even have to demonstrate that you can save up $6,000 first.

This is an outrage!

The safe limits for underwriting have for years been known to be 28%/36% and this is the reason why. At a 36% DTI the same family has $2,666 monthly pretax instead of $1,800 - a critical $850 that is the difference between being able to eat real food and cat food, having something with which to pay for child care, being able to afford a failed transmission in your car or a new water heater, and being able to make some sort of contribution to a retirement account.

This outrageous and corrupt attempt by our government to pump housing for the explicit purpose of shielding banks from having to take their losses as well as catering to the homebuilder and Realty industries is beyond the pale. These "affordability" ratios will do nothing other than generate millions of new foreclosures in the coming years, and the responsibility for each and every one of them rests directly with the present administration and the GSEs.

Everyone involved in this predatory conduct both within and beyond our government should find themselves in new housing - the graybar motel.

Uh-huh, the banks messed this up badly but don't you worry --- your Congressman is on top of it.


Previous Day's Trading Room Results:

Trade Date: 9/21/09

E-Mini S&P Trades*
(before fees and commissions):

1) FT buy @ 12:10pm at 1057.25 = +1.25 (1 lot)

2) Algorithm positions (9)

3) "Reading the Tape" positions (5) ...combined Secret's, Algo, & "Reading the Tape" total...+2.00


Electronic (YM) Mini-Dow:

1) None today



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