Mortgage Rate News

Even though the Federal Housing Administration is experiencing problems due to loan defaults and foreclosures, FHA loans are still performing relatively well. When you compare FHA loans to subprime loans, they are performing admirable. Indeed, the FHA is expected to be able to weather the current mortgage market crisis and recession in better shape than many mortgage lenders that were part of the subprime lending boom during the real estate bubble.

So far, the FHA has been able to operate without help from Congressional appropriations. The new losses may change that, but even so, the fact that FHA loans are in a much better place then their subprime counterparts is encourag

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ing. In the next few weeks, the FHA will consider whether appropriations are needed, and offer estimates for any necessary funding.Qualifying for an FHA loan

FHA loans have a special place in my heart, since that is how we bought our home in late 2007. FHA financing allowed us a low downpayment option with a good interest rate. FHA financing has been gaining in popularity since the mortgage market crisis, with 20% of home loans being made in this manner. In order to qualify for an FHA loan, here is what you need, according to CNN Money:

Although these loans target low- and moderate-income Americans, there are no income restrictions. However, FHA does limit the amount that can be borrowed, based on area home values. For example, the most that can be borrowed in a high-cost area such as New York City is $729,750; meanwhile, in Buffalo, N.Y., a purchaser can borrow no more than $276,250. Check the cap limits in your home town.

In addition, borrowers must pay an up-front insurance premium totaling 1.75% of the loan, which goes into FHA’s fund for repaying lenders if borrowers default. So if you take out a $200,000 loan, you would need $3,500 at closing, in additional to normal costs.

You can see why subprime lending, with its 0 down approach was more popular for so long. But it’s no surprise that now buyers are more interested in just getting the mortgage loan financing they need. FHA loans provide that.

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Mortgage lending banks have had problems lately with toxic assets on their balance sheets. Complex derivatives and credit default swaps make up a large amount of “assets” causing problems on the balance sheets of banks. After leveraging heavily to invest in these opaque vehicles that hardly anyone knew how to properly rate or value, banks are in trouble. Even more troubling is the fact that investors don’t want to touch these assets. In terms of market value, they’re basically worthless. This means that they cause serious damage to bank balance sheets, making it difficult for them to overcome losses. In order to “fix” this problem, the U.S. Financial Accounting Standards Boards has created some new rules to govern the way the value of these assets are figured.

Banks can value their own toxic assets

The new rules allow banks to use their own methods to determine the value of their illiquid assets. Rather than relying on market value, banks can come up with their own formulas to determine the worth of these securities. This will help bank balance sheets because, obviously, banks will rush to place higher values on the securities than the market does. The new rules allow banks to present themselves as — perhaps — healthier than they really are.

I’m not sure this is such a good idea.  After all, it basically allows banks and mortgage lenders to continue doing what they have been. Only this time they can decide how much something is worth, rather than the market. Mortgage lenders can take all of these risky mortgage-backed securities and essentially make up any value that suits them and their balance sheets. It means that it doesn’t really matter whether or or not we learn from the vicious cycle that got us into this mess; banks can just make stuff up to give the perception that they are improving in financial health — even though nothing has actually changed.

It’s turned into kind of a joke: “Failure Friday” has become a staple on many finance and mortgage blogs. Friday seems to be the day that regulators seize failing banks, and in the current climate, some people really like to hear about these failures. Failure Friday is almost an official term. I haven’t really got the whole Failure Friday thing here, but this week marks the 21st bank failure of 2009, and I thought I’d share something I’ve run across.

Of course, right now it’s more of a rumor. Bloomberg announced that Omni National Bank in Atlanta was seized. The FDIC, however, has not yet commented. So it will be interesting to see if it’s true. There were branches in Illinois, Texas, Georgia and Florida. Additionally, Pennsylvania and Alabama had loan offices.

I thought it might be interesting to show this handy interactive map offered by The Street:

As you can see, failed banks are costing hundreds of billions of dollars, but we’re still a ways from $1 trillion. Some analysts think that we’ll eventually get there, but I’m not so sure. After all, serious efforts are being made to get toxic assets off of major banks, and there are hopes that economic stimulus efforts will result in more liquidity and fewer bank failures.

It’s interesting, though, to see the concentration of bank closings. For the most part, the bubble real estate markets of recent years have seen the most bank closures. It seems as though bank failures are following along with the fate of the real estate markets they are in. This does make sense — since many banks are failing as the mortgages they hold go into default. I know that the single bank that has closed here in Utah is one that was heavily invested in builders and recent boom in Salt Lake City real estate. I’d imagine that there are similar patterns elsewhere.