http://findarticles.com/p/articles/mi_m0ITW/is_10_86/ai_n14897523/ National banks have had the power to make real estate loans since the Federal Reserve Act of 1913. However, that Act only permitted such loans on unencumbered farmland within its Federal Reserve district, for a term of no more than live years. Most significantly, for purposes of this article, was the inclusion of the first... [more]
http://findarticles.com/p/articles/mi_m0ITW/is_10_86/ai_n14897523/
National banks have had the power to make real estate loans since the Federal Reserve Act of 1913. However, that Act only permitted such loans on unencumbered farmland within its Federal Reserve district, for a term of no more than live years. Most significantly, for purposes of this article, was the inclusion of the first loan-to-value (LTV) limitation: "No such loan shall be made ... for an amount exceeding 50 per centum of the actual value of the property offered as security." Over the ensuing decades, the maximum LTV ratio steadily rose--to 60% in 1935, 66% in 1955, 80% in 1964, 90% in 1970, and 100% in 1989. Meanwhile, geographic and other restrictions fell away, and numerous exemptions from the ratios, such as loans under the National Housing Act, the Small Business Act, HUD, and the Community Development Act, were granted.
Financial institutions. Historically, insured depository institutions have avoided originating residential real estate loans with an LTV of greater than 80% unless the excess was secured by mortgage insurance, government guarantees, or other support. However, this trend has changed. From approximately 1994 through 2000, about one-fourth of all residential mortgages were originated with a high LTV; a high-residential real estate loan is defined as one that equals or exceeds 90% of the real estate's appraised value unless additional credit support such as mortgage insurance or other collateral reduces the ratio below 90%. At the same time, the delinquency rates (at least one month behind in payments) on, for example, loans insured through the Federal Housing Association, rose to over 10%.
Following the FDIC Improvement Act, the four federal banking regulators set forth new LTV guidelines, effective March 19, 1993 (the "1993 Guidelines"), as follows:
Institutions should establish their own internal loan-to-value
limits for real estate loans. These internal limits should not
exceed the following supervisory limits:
Raw land 65%
Land development loans 75%
Commercial or multifamily * construction loans 80%
One-to-four-family residential construction loans 85%
Improved property (completed commercial property,
other income-producing property, including farmland) 85%
Owner-occupied, one-to-four-family residential loans,
and home equity: **
[less]
great power point.. before 1964 no loans less than 80% ltv....
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Response by Fluter
over 16 years ago
Posts: 372
Member since: Apr 2009
Fascinating stuff, thanks for sharing, Riversider.
{Manhattan real estate agent.}
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Response by aboutready
over 16 years ago
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not the best source, but i'm not inclined to go further. riversider, that powerpoint simply doesn't say what you claim. and it negates your earlier argument that increased credit was the cause of the housing crisis during the depression. it was increased credit given to banks, not homeowners. they only had an average of 50% ltv, but could not refinance them when the short-term loans became due.
i am as horrified as the next person regarding the collapse in underwriting standards. but what was atypical here wasn't generally the LTV, it was the price to income and the fact that the higher LTV loans no longer needed insurance of any sort.
http://en.wikipedia.org/wiki/Federal_Housing_Administration By 1938, only four years after the beginning of the Federal Housing Association, a house could be purchased for a down payment of only ten percent of the purchase price. The remaining ninety percent was financed by a twenty-five year, self amortizing, FHA-insured mortgage loan. After World War II, the FHA helped finance homes for returning veterans and families of soldiers. It has helped with purchases of both single family and multi-family homes. In the 1950s, 1960s and 1970s, the FHA helped to spark the production of millions of units of privately-owned apartments for elderly, handicapped and lower income Americans. When the soaring inflation and energy costs threatened the survival of thousands of private apartment buildings in the 1970s, FHA’s emergency financing kept cash-strapped properties afloat. In the 1980s, when the economy didn’t support an increase in homeowners, the FHA helped to steady falling prices, making it possible for potential homeowners to finance when private mortgage insurers pulled out of oil producing states.[2]
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Response by Riversider
over 16 years ago
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Perception of risk is relative. Considering 90% LTV'S were only approved in 1970 and widely promoted and popularized since the early 90's it's amazing how they are viewed by so many as the norm or responsible lending.
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Response by aboutready
over 16 years ago
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By 1938, only four years after the beginning of the Federal Housing Association, a house could be purchased for a down payment of only ten percent of the purchase price.
In 1965 the Department of Housing and Urban Development (HUD) was formed. Within HUD operates the Federal Housing Administration (FHA), which has the primary responsibility for administering the government home loan insurance program. This program allows a first time home buyer who might otherwise not qualify for a home loan to obtain one because the risk is removed from the lender by FHA who insures the loan for the lender.
The most popular FHA home loan program for a first time home buyer is by far is the 203(b). This is your standard fixed rate loan
for 1-4 family owner occupied houses and only requires a minimum of 3% from the borrower. This loan also permits 100% of their money needed to close to be a gift from a relative, non-profit organization, or government agency.
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over 16 years ago
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in 1965 HUD ABSORBED FHA.
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In 1934 the federal banking system was restructured. The National Housing Act of 1934 was passed and the Federal Housing Administration was created. Its intent was to regulate the rate of interest and the terms of mortgages that it insured. These new lending practices increased the number of people who could afford a down payment on a house and monthly debt service payments on a mortgage, thereby also increasing the size of the market for single-family homes. (Garvin 2002)
Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.
Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment 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.
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over 16 years ago
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yes, didn't i mention that it had become a horrible creature of destruction? but whose fault is that? try the administration. they are so desperate to reinflate the bubble that they are doing this. as i have posted elsewhere (including that article) they have turned FHA into today's countrywide. The FHA's standard insurance program TODAY is notoriously lax.
FHA wasn't used much during the bubble. it wasn't needed, people could get loans with little to nothing down without paying the FHA insurance fee.
but in the 40s and 50s and 60s and 70s were there huge stories regarding FHA defaults? very high ltvs? no.
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Response by Riversider
over 16 years ago
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http://www.nytimes.com/2009/03/04/your-money/mortgages/04fha.html To qualify for the best interest rates on a new or refinanced mortgage, you need to have a top-notch credit score and a substantial down payment or home equity. But if you have less than perfect credit and less than 20 percent in home equity, an important threshold, you’ll have to pay a lot more. And that’s why many of those borrowers are turning to the F.H.A.
The F.H.A. requires down payments of only 3.5 percent and has less stringent credit requirements than conventional mortgages backed by Fannie Mae and Freddie Mac, the two government-controlled mortgage finance companies. F.H.A. mortgages also have become one of the least expensive alternatives for new mortgages and refinancing, given the increase in fees tacked onto traditional loans.
“Just about anyone that is putting down less than 20 percent needs to consider F.H.A. financing,” said Joe Rogers, executive vice president of Wells Fargo Home Mortgage. “That doesn’t mean they need to take it, but they should consider it.”
The F.H.A., which was created during the Great Depression, does not make loans, but insures mortgages that meet its guidelines. Because the F.H.A. is the only viable option for a lot of people, its loans now account for a much larger percentage of all mortgages. In 2005 and 2006, at the height of the housing boom, only 1.8 percent of all mortgages were F.H.A.-backed, according to Inside Mortgage Finance. Last year, that number ballooned to 17.1 percent. The F.H.A. now insures 4.8 million single-family mortgages worth about $550 billion.
Historically, F.H.A. loans carried a certain stigma. They were viewed as hard-to-obtain loans for low-income consumers with checkered credit histories and small down payments. They also tended to be more expensive.
But in the current market, the opposite is often true. Qualifying for a regular mortgage has become more expensive, sometimes prohibitively so, given the many fees that are now layered onto conventional loans backed by Fannie Mae and Freddie Mac.
The fees are generally levied on borrowers deemed to be more risky. The charges depend on your credit score and the amount of money you’re borrowing relative to the value of your home. But they tend to hit people with credit scores under 700 and less than 20 percent in home equity. Carrying a home equity loan may result in extra fees, as will taking cash out of your home when you refinance.
The extra charges aren’t the only hurdle consumers may face. Borrowers with less than 20 percent in home equity must also purchase private mortgage insurance. The insurance has become much more difficult to qualify for and more expensive, especially in areas where home values have declined the most.
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In 2005 and 2006, at the height of the housing boom, only 1.8 percent of all mortgages were F.H.A.-backed, according to Inside Mortgage Finance. Last year, that number ballooned to 17.1 percent. The F.H.A. now insures 4.8 million single-family mortgages worth about $550 billion.
Data on the geography of actual FHA loans was mostly kept secret, but when data has been released, scholars have found that FHA's generous programs were targeted disproportionately and almost exclusively to white Americans building homes in suburbs. Between 1935 and 1939, 220 out of 241 loans in St. Louis (91%) were located in the suburbs. From 1934 to 1960, the county of St. Louis received five times more FHA loans than the city of St. Louis, despite greater economic need in the city. Similarly, the average resident of Bronx County New York received just $10 in home mortgage loans from the FHA during its first 25 years, while the average resident in the wealthy Nassau County received $601 (Jackson 1985, Chapter 11).
Overall, the FHA has been accused of an anti-urban bias, and its practices precipitated the decline of many important American cities, by subsidizing the departure of white middle class Americans and refusing to give nearly as many loans for rental units, which would have been necessary to house low income workers. In 1968, Senator Paul Douglas of Illinois summed up the federal role in home finance: "The poor and those on the fringes of poverty have been almost completely excluded" (Jackson 1985, Chapter 11).
Recent performance shows that all types of FHA mortgages suffer from higher default rates than other mortgage loans. During the first quarter of 2004, conventional mortgages experienced a default rate of 2.25 percent, meaning that payments due on 2.25 percent of these mortgages were past due by 30 days or more. In contrast, FHA mortgages experienced a default rate of 11.66 percent in that same quarter, nearly five times greater. Disturbingly, the default rate on FHA loans also exceeded the default rate of conventional loans rated as “sub-prime,” defined as a loan made to a borrower with a below average credit record.
Reflecting a long-term deterioration in FHA loan performance, FHA’s most recent default rate of nearly 12 percent compares poorly to the 1998 default rate of 8.5 percent and the 1980 default rate of 6.6 percent. In contrast, over that same period default rates on VA mortgages increased from 5.3 percent to 7.4 percent, while conventional mortgage default rates actually fell slightly, from 3.1 percent in 1980 to 2.25 percent in early 2004. These contrary performance measures suggest that the rising default problem is unique to the FHA, whose underwriting standards were significantly liberalized during the Clinton Administration, and not related to any economy-wide problems that would have affected all borrowers.
Such problems have characterized other HUD no-down-payment mortgage programs in the past, most notably the infamous Section 235 program of the late 1960s. Among the many financial disasters that have befallen HUD over the years, the Section 235 program was one of the worst. Exceptionally high default rates, property abandonment, and costly foreclosures led to budget outlays well in excess of the amount of subsidies provided to buyers. These losses were largely a consequence of foreclosures that amounted to less than the dollar amount of the outstanding mortgages. Since FHA insured these mortgages—as it will do under the new programs—the federal government was ultimately responsible for these losses.
The Section 235 program was such a disaster that it was canceled in the mid-1970s by a bipartisan majority in Congress, and by 1979, 18 percent of the program’s mortgages had been foreclosed. The painful lessons of the experience were so enduring that no president or congress since has seriously contemplated the creation of a similar program, until now.
Homeowners who fall behind on their mortgage payments have become much less likely to catch up again, a new study shows.
The report from Fitch Ratings Ltd., a credit-rating firm, focuses on a plunge in the "cure rate" for mortgages that were packaged into securities. The study excludes loans guaranteed by government-backed agencies as well as those that weren't bundled into securities. The cure rate is the portion of delinquent loans that return to current payment status each month.
Fitch found that the cure rate for prime loans dropped to 6.6% as of July from an average of 45% for the years 2000 through 2006. For so-called Alt-A loans -- a category between prime and subprime that typically involves borrowers who don't fully document their income or assets -- the cure rate has fallen to 4.3% from 30.2%. In the subprime category, the rate has declined to 5.3% from 19.4%.
Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment 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.
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http://www.philadelphiafed.org/community-development/events/foreclosure-prevention/Community_Affairs_Housing_presentation.ppt
great power point.. before 1964 no loans less than 80% ltv....
Fascinating stuff, thanks for sharing, Riversider.
{Manhattan real estate agent.}
not the best source, but i'm not inclined to go further. riversider, that powerpoint simply doesn't say what you claim. and it negates your earlier argument that increased credit was the cause of the housing crisis during the depression. it was increased credit given to banks, not homeowners. they only had an average of 50% ltv, but could not refinance them when the short-term loans became due.
i am as horrified as the next person regarding the collapse in underwriting standards. but what was atypical here wasn't generally the LTV, it was the price to income and the fact that the higher LTV loans no longer needed insurance of any sort.
http://en.wikipedia.org/wiki/Federal_Housing_Administration
By 1938, only four years after the beginning of the Federal Housing Association, a house could be purchased for a down payment of only ten percent of the purchase price. The remaining ninety percent was financed by a twenty-five year, self amortizing, FHA-insured mortgage loan. After World War II, the FHA helped finance homes for returning veterans and families of soldiers. It has helped with purchases of both single family and multi-family homes. In the 1950s, 1960s and 1970s, the FHA helped to spark the production of millions of units of privately-owned apartments for elderly, handicapped and lower income Americans. When the soaring inflation and energy costs threatened the survival of thousands of private apartment buildings in the 1970s, FHA’s emergency financing kept cash-strapped properties afloat. In the 1980s, when the economy didn’t support an increase in homeowners, the FHA helped to steady falling prices, making it possible for potential homeowners to finance when private mortgage insurers pulled out of oil producing states.[2]
Perception of risk is relative. Considering 90% LTV'S were only approved in 1970 and widely promoted and popularized since the early 90's it's amazing how they are viewed by so many as the norm or responsible lending.
By 1938, only four years after the beginning of the Federal Housing Association, a house could be purchased for a down payment of only ten percent of the purchase price.
1938, riversider. 1938.
http://www.fhainfo.com/whatisanfhaloan.htm
In 1965 the Department of Housing and Urban Development (HUD) was formed. Within HUD operates the Federal Housing Administration (FHA), which has the primary responsibility for administering the government home loan insurance program. This program allows a first time home buyer who might otherwise not qualify for a home loan to obtain one because the risk is removed from the lender by FHA who insures the loan for the lender.
The most popular FHA home loan program for a first time home buyer is by far is the 203(b). This is your standard fixed rate loan
for 1-4 family owner occupied houses and only requires a minimum of 3% from the borrower. This loan also permits 100% of their money needed to close to be a gift from a relative, non-profit organization, or government agency.
in 1965 HUD ABSORBED FHA.
In 1934 the federal banking system was restructured. The National Housing Act of 1934 was passed and the Federal Housing Administration was created. Its intent was to regulate the rate of interest and the terms of mortgages that it insured. These new lending practices increased the number of people who could afford a down payment on a house and monthly debt service payments on a mortgage, thereby also increasing the size of the market for single-family homes. (Garvin 2002)
FHA = SUBPRIME
http://online.wsj.com/article/SB10001424052970204908604574334662183078806.html
Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.
Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment 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.
yes, didn't i mention that it had become a horrible creature of destruction? but whose fault is that? try the administration. they are so desperate to reinflate the bubble that they are doing this. as i have posted elsewhere (including that article) they have turned FHA into today's countrywide. The FHA's standard insurance program TODAY is notoriously lax.
FHA wasn't used much during the bubble. it wasn't needed, people could get loans with little to nothing down without paying the FHA insurance fee.
but in the 40s and 50s and 60s and 70s were there huge stories regarding FHA defaults? very high ltvs? no.
http://www.nytimes.com/2009/03/04/your-money/mortgages/04fha.html
To qualify for the best interest rates on a new or refinanced mortgage, you need to have a top-notch credit score and a substantial down payment or home equity. But if you have less than perfect credit and less than 20 percent in home equity, an important threshold, you’ll have to pay a lot more. And that’s why many of those borrowers are turning to the F.H.A.
The F.H.A. requires down payments of only 3.5 percent and has less stringent credit requirements than conventional mortgages backed by Fannie Mae and Freddie Mac, the two government-controlled mortgage finance companies. F.H.A. mortgages also have become one of the least expensive alternatives for new mortgages and refinancing, given the increase in fees tacked onto traditional loans.
“Just about anyone that is putting down less than 20 percent needs to consider F.H.A. financing,” said Joe Rogers, executive vice president of Wells Fargo Home Mortgage. “That doesn’t mean they need to take it, but they should consider it.”
The F.H.A., which was created during the Great Depression, does not make loans, but insures mortgages that meet its guidelines. Because the F.H.A. is the only viable option for a lot of people, its loans now account for a much larger percentage of all mortgages. In 2005 and 2006, at the height of the housing boom, only 1.8 percent of all mortgages were F.H.A.-backed, according to Inside Mortgage Finance. Last year, that number ballooned to 17.1 percent. The F.H.A. now insures 4.8 million single-family mortgages worth about $550 billion.
Historically, F.H.A. loans carried a certain stigma. They were viewed as hard-to-obtain loans for low-income consumers with checkered credit histories and small down payments. They also tended to be more expensive.
But in the current market, the opposite is often true. Qualifying for a regular mortgage has become more expensive, sometimes prohibitively so, given the many fees that are now layered onto conventional loans backed by Fannie Mae and Freddie Mac.
The fees are generally levied on borrowers deemed to be more risky. The charges depend on your credit score and the amount of money you’re borrowing relative to the value of your home. But they tend to hit people with credit scores under 700 and less than 20 percent in home equity. Carrying a home equity loan may result in extra fees, as will taking cash out of your home when you refinance.
The extra charges aren’t the only hurdle consumers may face. Borrowers with less than 20 percent in home equity must also purchase private mortgage insurance. The insurance has become much more difficult to qualify for and more expensive, especially in areas where home values have declined the most.
In 2005 and 2006, at the height of the housing boom, only 1.8 percent of all mortgages were F.H.A.-backed, according to Inside Mortgage Finance. Last year, that number ballooned to 17.1 percent. The F.H.A. now insures 4.8 million single-family mortgages worth about $550 billion.
Data on the geography of actual FHA loans was mostly kept secret, but when data has been released, scholars have found that FHA's generous programs were targeted disproportionately and almost exclusively to white Americans building homes in suburbs. Between 1935 and 1939, 220 out of 241 loans in St. Louis (91%) were located in the suburbs. From 1934 to 1960, the county of St. Louis received five times more FHA loans than the city of St. Louis, despite greater economic need in the city. Similarly, the average resident of Bronx County New York received just $10 in home mortgage loans from the FHA during its first 25 years, while the average resident in the wealthy Nassau County received $601 (Jackson 1985, Chapter 11).
Overall, the FHA has been accused of an anti-urban bias, and its practices precipitated the decline of many important American cities, by subsidizing the departure of white middle class Americans and refusing to give nearly as many loans for rental units, which would have been necessary to house low income workers. In 1968, Senator Paul Douglas of Illinois summed up the federal role in home finance: "The poor and those on the fringes of poverty have been almost completely excluded" (Jackson 1985, Chapter 11).
farewell. keep up the good fight.
http://www.heritage.org/research/budget/wm529.cfm
Recent performance shows that all types of FHA mortgages suffer from higher default rates than other mortgage loans. During the first quarter of 2004, conventional mortgages experienced a default rate of 2.25 percent, meaning that payments due on 2.25 percent of these mortgages were past due by 30 days or more. In contrast, FHA mortgages experienced a default rate of 11.66 percent in that same quarter, nearly five times greater. Disturbingly, the default rate on FHA loans also exceeded the default rate of conventional loans rated as “sub-prime,” defined as a loan made to a borrower with a below average credit record.
Reflecting a long-term deterioration in FHA loan performance, FHA’s most recent default rate of nearly 12 percent compares poorly to the 1998 default rate of 8.5 percent and the 1980 default rate of 6.6 percent. In contrast, over that same period default rates on VA mortgages increased from 5.3 percent to 7.4 percent, while conventional mortgage default rates actually fell slightly, from 3.1 percent in 1980 to 2.25 percent in early 2004. These contrary performance measures suggest that the rising default problem is unique to the FHA, whose underwriting standards were significantly liberalized during the Clinton Administration, and not related to any economy-wide problems that would have affected all borrowers.
Such problems have characterized other HUD no-down-payment mortgage programs in the past, most notably the infamous Section 235 program of the late 1960s. Among the many financial disasters that have befallen HUD over the years, the Section 235 program was one of the worst. Exceptionally high default rates, property abandonment, and costly foreclosures led to budget outlays well in excess of the amount of subsidies provided to buyers. These losses were largely a consequence of foreclosures that amounted to less than the dollar amount of the outstanding mortgages. Since FHA insured these mortgages—as it will do under the new programs—the federal government was ultimately responsible for these losses.
The Section 235 program was such a disaster that it was canceled in the mid-1970s by a bipartisan majority in Congress, and by 1979, 18 percent of the program’s mortgages had been foreclosed. The painful lessons of the experience were so enduring that no president or congress since has seriously contemplated the creation of a similar program, until now.
This is good data.
http://whistleblower.ml-implode.com/?p=22
http://whistleblower.ml-implode.com/wp-content/uploads/2008/07/whistle-blower-power-point001.jpg
http://whistleblower.ml-implode.com/wp-content/uploads/2008/07/whistle-blower-power-point002.jpg
Aparently if you fall behind you never catch up....
http://online.wsj.com/article/SB125113686930654371.html
Homeowners who fall behind on their mortgage payments have become much less likely to catch up again, a new study shows.
The report from Fitch Ratings Ltd., a credit-rating firm, focuses on a plunge in the "cure rate" for mortgages that were packaged into securities. The study excludes loans guaranteed by government-backed agencies as well as those that weren't bundled into securities. The cure rate is the portion of delinquent loans that return to current payment status each month.
Fitch found that the cure rate for prime loans dropped to 6.6% as of July from an average of 45% for the years 2000 through 2006. For so-called Alt-A loans -- a category between prime and subprime that typically involves borrowers who don't fully document their income or assets -- the cure rate has fallen to 4.3% from 30.2%. In the subprime category, the rate has declined to 5.3% from 19.4%.
http://online.wsj.com/article/SB10001424052970204908604574334662183078806.html
Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment 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.