I've become numb a long time ago ... but seeing these programs and solutions one after the other is simply.... I don't have words. Just enjoy - last week we mentioned how some states had created a work around to use the tax REBATE (i.e. AFTER you buy the home you get the handout) as a substitute for a down payment and closing costs [ May 8: Minyanville - Subprime Lending is Back with a Vengeance ]

  • In an effort to boost home buying -- even for marginally qualified borrowers -- a number of states are finding creative ways to advance the tax credit to buyers on the day they get their new keys , r ather than having to wait for next year's refund check. This allows buyers to pay for things like closing costs, mortgage points - or even the down payment.

Well folks - it did not take long... the early results of letting people who cannot even find enough money to put 3.5% down into the housing market must of been spectacular. Because in just the blink of an eye this adjustment to what Congress originally approved, has now become the federal standard .

  • (May 12, 2009) Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, said that the Federal Housing Administration is going to permit its lenders to allow homeowners to use the $8,000 tax credit as a downpayment .
  • Secretary Donovan said that important changes, which the National Association of Realtors(R) has been calling for , will help consumers purchase a home. We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a downpayment , Donovan said. According to Donovan, the FHA's approved lenders will be permitted to monetize the tax credit through short-term bridge loans. This will allow eligible home buyers to access the funds immediately at the closing table.

This is the same FHA we posted last week would cause the next housing bust [ May 6: WSJ - FHA Loans, the Next Housing Bust ]

Last year banks issued $180 billion of new mortgages insured by the FHA, which means they carry a 100% taxpayer guarantee . Many of these have the same characteristics as subprime loans: low downpayment requirements, high-risk borrowers, and in many cases shady mortgage originators. FHA now insures nearly one of every three new mortgages, up from 2% in 2006 .

... taxpayer losses are mounting on its $562 billion portfolio . According to Mortgage Bankers Association data, more than one in eight FHA loans is now delinquent -- nearly triple the rate on conventional, nonsubprime loan portfolios . Another 7.5% of recent FHA loans are in serious delinquency, which means at least three months overdue.

Because FHA also allows borrowers to finance closing costs and other fees as part of the mortgage, the purchaser's equity can be very close to zero .

So let's wrap this up and put a bow on it. Effectively the US government is going to allow people with 3.5% down (now covered by the tax payers gift of $8000) to enter into agreements of sub 5% mortgage rates, to FICO scores as low as 620. As long as its your first home. Closing costs? Remembers the FHA allows people to finance that... you don't need to have it on you.

To put that in perspective this means, based on the median home price in America - about 70% of homes are now available to home buyers for less upfront than a rental. In a rental you at least need to save enough to put down a security deposit. Under this innovative program (that was not the original intent of the legislation) $8000 can finance 3.5% down on up to a $228,000 home. Anyone who can make the monthly payments from there now is welcome to join the home ownership class. Or if you really don't care about your 620, 630 FICO score you can basically get into one of these homes, not make a single payment and live rent free from 12-18 months before they get around to foreclosing on you (which many banks are dragging their feet on).

And if the home value goes down even 1% and you find yourself immediately underwater? You walk away and send the keys to the US taxpayer - we're going to pay for it on the back end as well as the front end.

This is what was done in the auto industry - it's called pulling forward demand with greater and greater incentives (0% interest rates for multiple years, $4K, $5K, $6K rebates). Now we pulled almost all natural demand for home buyers that should of been arriving in 2008-2009 into 2006-2007. So you have to create an even stronger drug when you can rustle up enough home buyers. And here we are.... and when home data drops at a slower rate than the previous period we can rally on 2 nd derivative improvement... failing to mention whom is bearing the costs for that improvement .

Am I surprised? No. It's all Groundhog Day at this point - each program begins to sound like the other. Common theme is taxpayer handouts and taxpayers bearing risk - Kick the Can policies. In my predictions piece for 2009 I wrote things would get so desperate... err, correction - I wrote green shoots would be so plentiful that:

But larger than that - my prediction is Fannie/Freddie and then above and beyond that, for people who do not have 20% down and won't pay for insurance, the FHA - will wage a war against current mortgages. We'll see interest rate buydowns , we'll see principal reductions, we'll see anything and everything that basically gives a big (bleep) you to people who have been honoring the system. In return we will tell those people, well if your neighbor's house goes into foreclosure we will all suffer, so it's a necessary evil.

By the back half of 2009, refinancing will reach levels (and above) seen in the bubble years of 2005-2006. Obama & Co will also come up with myriad plans for buyers to suck up excess inventory - the government will be our partner . Nothing should surprise you - this will be an all out assault - we are already seeing the first inane ideas such as no appraisal refinances. The private mortgage industry will be almost completely crowded out as no one can compete with what the government will offer.

Mission Accomplished

On that note - Freddie Mac asked for another $6B of bailouts last night. Just put in on the tab.

Mortgage Down