In the simplest way of saying this, lets compare what happened during the mortgage crisis and whats happening now.  During the real estate bubble, individuals were purchasing real estate in lets say the West Village, New York.  And they didnt have any income verification or any money to put down for an apartment.  No problem.  Banks were giving out financing like crazy and so the purchasers would take out 100% financing.  Sometimes they would even walk away from their New York City purchase WITH MONEY in their hand after they purchased a unit for a few million.  We know how the story ends.  It’s not a stretch to say the majority of people who purchased homes in the West Village, Park Slope, Williamsburg, or anywhere in New York City with 100% financing have either foreclosed, are behind in their mortgage payments, or are having issues.

During this bubble, FHA wasnt a word that was used much.  The FHA is basically a government agency that insures the loans private lenders give out, and there were caps on those loans in 2004, 2005, etc.  Here is an explanation from the New York Times:

“F.H.A. insurance was created for minority and low-income families who could not come up with the traditional down payment of 20 percent required by private lenders. Buyers receive loans from government-approved lenders and are required to document their income and assets. They must pay a substantial insurance premium of 1.75 percent of the loan. But in return, their down payment can be as low as 3.5 percent”

So basically the FHA wasnt insuring very many loans then (proportionate to the loans being taken out.)  So if a purchaser just bought a new condo in Union Square New York, and he/she stopped paying, the bank was screwed, and maybe the underwriter of the loan, but not the government.

Fast forward to 2009.  This Manhattan Real Estate Attorney is seeing tons of deals being financed using FHA Loans, for individuals who have very little if anything to put down.  Sound familiar?  Well for the privilege of receiving an FHA loan, which now insures the Private lender that Uncle Sam will step in if the purchaser of that condo in the Financial District defaults, all the purchaser has to do is put own 3.5% of the purchase price.  And guess what?  The credit requirements aren’t too stringent to get a loan.  Lastly, a seller can actually give a concession to help the purchaser pay for the closing costs for his/her shiny new construction closing in Park Slope. Does any of this sound familiar?

Lets go a bit further.  That same New York Times article states:

“At Guarantee Mortgage Corporation, which has 150 mortgage brokers in the Bay Area, Seattle and Portland, Ore., F.H.A. loans have grown to about 15 percent of its business, from less than 3 percent a few years ago.

“”It sure has helped us put a lot of deals together,” said Guarantee’s chief sales officer, Bob Siefert. He predicts that a quarter of Guarantee’s deals will soon be guaranteed by the F.H.A.

Some F.H.A. borrowers here say they have the cash for a full down payment but would rather invest it in the stock market or use it for remodeling.”

And even more troubling, courtesy of the LA Times:

“This year alone the agency has backed nearly 2 million mortgages worth at least $328 billion. It insured 21.5% of all new mortgages last year, up from fewer than 6% in 2007.”

Look here is the issue for me.  If you’re looking to buy a condo in the East Village, and you have money for a downpayment, thats great.  Good luck to you and I’d love to be your East Village Real Estate Attorney.  And for the many people who are using FHA to buy homes they can afford all over Greenpoint Brooklyn, Williamsburg, or wherever, good luck to you too.  But this Manhattan Real Estate lawyer fears that FHA is being overused.  Really, the only distinction between this subprime mess and FHA is about 3.5%.  In other words, where before you could buy a condo in Harlem and finance all of it, now, after everything that weve gone through in the Real Estate market, you could buy a condo, but only finance 97.5%!  Its insanity to me.  Its almost like this is an artifical prop to the real estate market all over New York, let alone the country.  Except the difference is, when people start defaulting on their purchase of a Condo in Brighton Beach, the lender wont be on the hook, we will.

And some more news:  Representatives in Congress are looking at way of INCREASING the amount an individual can borrow to qualify for an FHA loan.  The limits on an FHA backed loan is now about $730,000.00.  Which means the government is insuring every penny of that loan if the purchaser defaults.  This is downright scary in my opinion.

But we all know this. We all know that there is a mortgage crisis and that many people are close, if not in, foreclosure already. What is a first time home buyer to do? Here are a few tips that I tell every one of my Real Estate clients in my practice:

1. Buy a home you can AFFORD! This tidbit may seem quite obvious to some, but some of my past clients have attempted to purchase homes they simply could not afford. While ultimately this is your decision as a client, you should nevertheless look at your financial situation before going into contract on a property. Ideally, what you want first and foremost is a strong credit rating,which will enable you to obtain a mortgage at the best interest rates,thereby saving you thousands upon thousands of dollars during the life of the loan.
2. Next, look at your monthly expenses. If your mortgage is taking up more than 40% of your net pay, then it is very likely that it is too expensive to purchase.Make sure you realize that the current Real Estate market is not the same market as it was three or fours years ago. I don’t care that your neighbor was able to flip his property in 2004 and make 60% back overnight. This is not the same ballgame. You should realistically expect to hold on to the property for at least 7 years (the national average). Take this into account if your simply thinking of buying a property to fix it up and sell it in a year or two.
3. Do you have an emergency fund? Typically you want three to six months of living expenses put away when you purchase this house, so that if you find yourself out of work a year from now, or if some other emergency occurs, you will still be able to pay the mortgage and wont risk hurting your credit or going into foreclosure.
4. Find a lender you TRUST. Let me say this again…FIND A LENDER YOU TRUST. In the past few years many people have “become” mortgage brokers. Do not simply hire the first name you’re given. The last thing you want is to show up at the closing and have to pay thousands of dollars out of your pocket for surprise fees that you knew nothing about, and which were not explained to you by your broker. Ask for references from the broker himself. If he or she is an established broker, he should have no problem supplying them. Another option that I frequently advise my clients to look at are online banks such as ING Direct, E-Loan, or E-Trade. These institutions do not typically have brick and mortar establishments. Without physical branches, there are less expenses, which usually means they are able to pass on those savings to the consumer, in the form of better interest rates and a reduction in closing costs. Finally, I recommend perusing www.bankrate.com before you decide on a lender. This site will not only give you a list of national mortgage lenders, but it will explain what closing costs, if any, the lender charges, as well as the interest rate charged for a particular type of loan.
5. Finally, consult with your attorney about the above BEFORE you sign that contract of sale. Unfortunately, some “Real Estate” attorneys in New York will simply make a few changes to a Contract of Sale and show up to a closing to collect their fee. You don’t want that, nor do you deserve it. You want an attorney who understands that this is a process with several steps along the way. This is your livelihood and your happiness. Make sure you find an attorney who understands that and will guide you along the way. In my practice,I make it a rule to sit down with a client for at least one hour before we even discuss the Contract of Sale. We discuss their finances, the time frame of living in the property, and what type of mortgage they are looking for and why. Its my job, as an attorney,to educate that client and make sure there are never surprises along the way. Buying a home, after all, still is the American Dream and should be an incredibly rewarding and satisfying experience.