I've said it before and I'll say it again. The housing market is in a very strange place. It has become the place where speculators and novice investors dream of big profits and prosperity. Leverage is the name of the game and yet few understand it but partake in it. At the same time, the government encouraged us to take risk by providing loan with as little as 3% down payment via the Federal Housing Administration (FHA). This mean you can leverage 97% of the bank's money. As long as you meet the guideline, a bank will lend you 97% then sell the loan to FHA which back investors against all losses. NO, they are NOT backing you, the mortgage holder, but the investors who will buy your loan as mortgage backed security (MBS).
Today, the Mortgage Data Web issued a news article mentioning that FHA purchase mortgages reaches new high. That's not good news to me. For the government to back anything is never good news. Think about the cash-for-clunker program, Freddie Mac, and Frannie Mae. These programs may help boost short-term demand but they never provide sustained long-term demand.
I believe FHA may need a bailout in the future. Of course they will deny it. Bear Stearns, Lehman, and AIG all denied that they were going down but they did. Whitney Tilson even spoke about it in the video below.
I am not suggesting that all government backed program are bad but I am suggesting that there should be some strict guidelines before any problem arises. I've recently purchased a condo with the help of FHA but I did so with 15% down payment instead of 3% minimum requirement. Without FHA, I may have not been able to secure the loan I need so I am thankful that FHA was there. I voiced my concern over many people who still has the speculation mentality but with little capital. As a result, any decline in the purchase price may wipe out their entire equity. The days of no-down, no-doc, no-problem are over. That was replaced by 3% down, some-doc, and your-problem.
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