February 4, 2010 - The Federal Housing Administration (FHA) is running out of money. The reason for this is that the agency, which insures mortgages for lenders, is being hammered by the nation's high foreclosure rate. Not surprisingly, the FHA has tightened their lending standards, but at the same time they have also implemented a policy that could just create another housing bubble. As of this past Monday, the FHA is allowing buyers that use FHA insured loans to quickly turn around and sell their property. This is an activity commonly referred to as "flipping" and it is usually engaged in by real estate speculators. It was one of the primary factors that fueled the boom in housing prices over the last decade and which led to the collapse in real estate markets in late 2008.
The FHA is strapped for cash. More than 9% of the loans insured by the agency had three or more missed payments as of December, 2009. That's a 40% increase from 2008 numbers, and the trend is continuing to increase.
The situation has become so bad that the FHA may actually run through its cash reserves; something that has never happened before. These reserves come from the fees that borrowers pay when they take out an FHA insured loan.
If the FHA does run out of money, they won't be out of business though. Instead, the government will automatically step in and use taxpayer money to shore up the organization. It's a bailout that taxpayers will have no control over.
The FHA is blaming the problem on lending activity in 2007 and 2008. Apparently as mortgage markets began to collapse, lenders and loan brokers started putting many of their clients into FHA backed loans. At the time, the FHA hadn't bothered to raise its lending standards. The agency also had a program in place that allowed the seller of a property to fund the down payment. This meant that sellers could inflate their price and provide the down payment, while buyers could get into a home without any having any money at risk. This little program is expected to cost the FHA $10.5 Billion due to the high rate of defaults associated with it.
Fortunately, the FHA has now tightened lending standards to reduce risk and eliminated the ability of sellers to provide the down payment for a property purchase. Unfortunately, the agency has now decided to encourage some of the same types of behavior that created the housing bubble in the first place.
As of this past Monday, anyone applying for an FHA loan will be allowed to purchase a property and then sell it immediately. For years, they had required homeowners to keep their property for at least 90 days. While that may not sound like a long time, those who flip homes need to sell quickly; often within days of closing.
The FHA is saying that it is doing this to help clear out the glut of foreclosed properties on the market. But it is unclear that the new rule will do anything to reduce the number of properties available for sale. In fact, it is more likely to force prices higher in the short term - creating a housing bubble - only to see those prices fall again when the bubble bursts. It is a very dangerous move for housing markets and it could expose taxpayers to even greater losses if the experiment backfires.
The new FHA flipping rule will be in place for the next year.
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