What's This About FHA?

Yesterday was the worst day for bonds in two months, as money poured out of the bond market and into stocks, leading to an almost 400-point gain on the Dow. Mortgage rates loosely follow bond rates, which rose from a low of 4.39 on Monday to 4.59 this morning on the 10-year treasury. That's a gigantic move, and it's pushed mortgage rates from 5.625% Monday to 6% this morning. I'd love to tell you that that means the worst is over, but I don't think it is. Until credit markets unfreeze, we're not going to be able to get substantially lower.

A word on FHA loans: the market currently seems perfectly happy to structure itself so that the government takes all the risk. Until a month ago, I was still of the opinion that FHA loans were a bad deal for the consumer much of the time. They carry mandatory mortgage insurance, and they also have an up-front fee of 1.5% of the loan amount tacked on to the closing costs. The tradeoff is that the rate is usually about .25% lower. Most of the time, that wasn't a very good trade. Recently, however, credit restrictions have tightened to such an alarming degree that for a large number of borrowers there simply is no alternative. We offer FHA loans, and we've been funneling more and more of our borrowers into them, especially those needing to consolidate debt. That's a trend I see continuing all this year.

There have recently been large increases in the FHA loan limits, and although these are only temporary (expire this year), they do provide additional impetus for financing through government loans. But even here, FHA has recently chucked their non-FICO-driven status, and now if you have a credit score below 580 - and don't scoff; there are millions of people in this boat - you won't get an FHA loan, either. There are no 100% loans any more, there are no loans below 80% LTV for those with worse than 680 scores (other than FHA), and now there are simply no loans at all for people below 580. Well, okay, there are loans for those people, but they are the hard-money variety.

In related news, it's true that foreclosures are rising and there are cheap houses available out there. It's also true that those houses are only going to be available to those with lots of cash and really good credit. That's simply the reality. So once again, there are ways to make money in this market, and those that make it will be those that were already making it. O be wise, what can I say more?

Cj

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