Why the FHA Will Need a Bailout

This has been speculated for some time now, but a WSJ article highlights a report showing that the FHA reserves has fallen below federally mandated levels. The reason for the levels falling below the minimums is because Congress made the agency fill in for private banks in 2007-2008 when banks began to pull out of the market. Of course there was a fair amount of fraud involved, because the government can never figure out how to rid itself of fraudulent behavior, but at the end of the day the firm took on risky borrowers.

Not to mention that Congress has literally no one to blame but themselves for this fiasco as they pressured the agency themselves. I am confident that they will find a scapegoat within the agency as Congress refuses to accept any responsibility for their own behavior. According to the WSJ the FHA will suffer some significant losses from loans written from 2007/08 because they had loosened their standards. The percentage of losses is pretty significant, from my perspective, but when you know there are 350M taxpayers behind you, well what is a little risk?

Here is what the WSJ said:

“Although the FHA has tightened credit standards, many of the 2007 and early 2008 mortgages are going bad. The agency expects defaults on 24% of all loans insured in 2007, and 20% of those backed in 2008.”

The article went on to say:

“This month, the FHA is to release the findings of its annual audit, which will show that the projected value of the agency’s reserves has fallen below a federally mandated level, raising concerns that the FHA may need taxpayer money for the first time in its 75-year history. FHA officials say the agency has enough capital to withstand expected losses.”

The loans being hit the hardest are the refinancing loans, of course, which are a double whammy as the asset value is now worth much less than the loan value. The most shocking portion of the report, besides the fact that the FHA will more than likely need capital, is that loans written in 2007 for people with credit scores of less than 600 rose to 37% of the loans written. That is almost 4 out of every 10 borrowers had a credit score so low they probably could not get a secured credit card, but a mortgage, no problem. Of course the firm tightened standards after the collapse and now works with firms who implement their own minimum standards, but the damage is done.

What is not attached to the article is the exact dollar figure for these loans, but by the looks of the chart provided it is clearly substantial. It is becoming more apparent that the FHA is in or in the beginning stages of a major problem. Whether or not anyone cares about this problem is also another story, but this is a major deal as it puts the taxpayer on the hook again. Not only that, but it also proves that this mess is not over and the problems are still with us today, regardless of what we are being told by the Fed and other cheerleaders.

Comments

[Leftfield:]

House of cards, train wreck, whatever. The damage done by decades of excessive corrupt government partnered with Wall St. and extreme leverage has guaranteed collapse.
Covering up as much as possible by rewarding the frauds and failures will, surprise, continue to yield entertaining fiascos like the FHA.
The cronies and enablers are trying to engineer a slow-motion collapse via bailouts, QE, credit to the most uncreditworthy TBTF's, and buyouts of their low-value "assets," to keep the perpetrators in place. To keep financial assets inflated while bleeding Main St. slowly enough so they won't notice.
Don't worry, the politicians, lawyers and financial engineers are in charge.

Nov 04 11:43 AM

[a fat panda:]

Just to be clear, it doesn't look from the charts that the rise in volume occurred in 2007. It appears to have started growing in 2008 and spiked in 2009. What was the credit quality like in 2008 and early 2009 because the problem is going to be much worse next year from the looks of your chart.

Nov 04 11:56 AM

[Petr Nedved:]

FHA's spike in loan production started in 2008, it was almost an overnight increase. FHA's problems are not a function of their underwriting, they are a result of general economic weakness. These are not the same borrowers who qualified with no documentation, SIVA, No Ratio, and scores under 580. While GN did permit scores under 580, most lenders refused to purchase those loans in 2008. Yes, down payment requirements made it easier for illiquid borrower to get government funding, but FHA underwriting requirements are no where near as lax as anything Alt-A. The Ex-FHA Commissioner comments on that here:

www.mortgagenewsdaily....

Nov 04 12:53 PM

[Smalltownba...:]

The problem in 2007 was almost exclusively caused by Seller Funded Down Payment Assistance programs that exploded as the only form of 100% financing available once Subprime lending sources evaporated. FHA as an agency had been trying to close this IRS loophole for more than a decade but Congress refused to cooperate until they saw it cratering the performance of FHA loans in 2007 and finally acted legislatively to end the practice completely in early 2008. FHA did not cause this problem and the author correctly identifies that they were an instrument manipulated by Congress and the Administration(s) for the purpose of managing the crisis.

Nov 05 10:29 AM

[K Smith:]

The FHA is still making no money down loans -

"...the FHA is aggressively promoting lending with only 3.5% down, and the $8k tax credit for buying a house less than $200k. A good realtor can apply the tax credit to last year's taxes, making sure that the buyer actually gets the money right away, and the HUD is actually OK with using the $8k to make buying a home a no-money-down proposition. "

from
seekingalpha.com/artic...

Nov 06 12:04 PM