Housing and Banking Woes to Continue

The FHA is running on empty. The FDIC approves the pre-pay plan to build its Deposit insurance Fund. The Housing and Banking Indices remain a drag on the economy and markets.

The US Federal Housing Administration (FHA) will likely join Fannie (FNM) and Freddie (FRE) as a ward of US tax payers. The FHA's excess reserves available to cover losses have fallen to 0.53% of the agency's book of business at the end of Q3 2009. This is down from 3% year over year. The cushion mandated by Congress is 2%, so the health of the FHA is a huge Red flag for the housing market and tax payers.

If the FHA needs an appropriation from Congress it would be the first time in its 75-year history. Since they are an arm of the US government the Treasury would have no choice but to rebuild its reserves.

The FHA insures mortgages for eligible borrowers, and its business has increased to meet demand as private-sector lenders have pulled back during the housing downturn. Rising defaults on FHA loans will mean that a taxpayer bailout will be needed. Defaults on FHA backed loans reached 8.24% in September, up from 8.1% in August and 6.1% one year ago.

As a result of this stress, the FHA is tightening its lending standards, which is another drag on housing.

The FDIC is requiring member banks to pre-pay fees for 2010 through 2012 to rebuild its Deposit insurance Fund

The total take from the banking system is $45 billion. This is a bad decision as banks struggle with increasing bad loans. Remember that more than 3,000 banks are overexposed to C&D and CRE loans.

Today is Bank Failure Friday and banks are failing at a faster pace of the past seventeen years. In the first half of 2009 the FDIC closed 45 banks, which cost the Deposit Insurance Fund $12.5 billion.

In the second half of 2009 through November 6, the FDIC closed 75 banks, which cost the Deposit Insurance Fund another $19.8 billion.

As the FDIC awaits the $45 billion in three year prepaid fees due at year end, I estimate that the Deposit Insurance Fund is in arrears by $9.4 billion.

Meanwhile the banks strapped to make these payments will reduce lending, and will become more vulnerable for failure.

My idea is to simply turn over the remaining $210 billion in TARP funds to the FDIC and credit the money to the Deposit Insurance Fund. This would take the fund back above the 1.15% ratio of insured deposits, which is required by June 2013. On June 30 the ratio was a paltry 0.22%.

I would rather see the FDIC tap its temporary $500 billion line of credit with the US Treasury than tap struggling member banks.

The Housing Sector Index (^HGX) failed at its 50-day simple moving average the past two days at 102.67. This indicates risk to the 200-day at 88.67. Charts courtesy of Thomson / Reuters

The America’s Community Bankers Index (^ABAQ) stayed below its 50-day and 200-day simple moving averages at 143.31 and 146.82.

The Regional Bankers Index (^BKX) stayed below 21-day and 50-day simple moving averages at 44.57 and 45.82 this week with the 200-day as support at 37.34.

You cannot have a bull market for stocks with a bear market in bank stocks!

Disclosure: I Hold No Positions in the Stocks I Cover.

Comments

[outtafavr:]

Discussing it is treason. Just sit and quietly wait for the dam to break.

Nov 13 09:58 PM

[john s. gordon:]

the deposit insurance prepay plan is a warning that disaster looms/
> jack

Nov 14 10:07 AM

[basehitz:]

Oct 8 from NY Times
“Problems at the Federal Housing Administration, which guarantees mortgages with low down payments, are becoming so acute that some experts warn the agency might need a federal bailout.”

FHA commissioner Stevens before House Subcommittee:
“Stevens assured lawmakers that his agency would not need a bailout and that it was managing its risks.”

"But he (Stevens) acknowledged that 20% of FHA loans insured last year — and as many as 24% from 2007 — faced serious problems including foreclosure.”

Recall, his testimony before Congress was just last month. Seems “fixing” the real estate bubble facilitated by crappy lending practices, is . . . well, more of the same.

Link to NYT article
www.nytimes.com/2009/1...

Nov 14 01:13 PM

[KirbyJF1:]

Richard

Glad to see you had enough courage to get out of your bomb shelter for awhile to sniff the fresh air. Seem as if you know how to dissect today's problems, however your criticism for any solution which doesn't provide for unemployment lines & bankruptcy is telling on your real lack of solutions. You seem to have disdain for anyone who dared to have a mortgage or a balance on a credit card and have fallen victim to their own folly or lack of underwriting from a financial institution. By the way its the banking industries responsibility to provide funding for the FDIC not the taxpayers.((Your criticism for Government intervention is very obvious , yet your solution is for a loan from the federal government**you can't have it both way unless your a politician)) Another point you made was that banks aren't lending. First off how many more new homes or condo's do we need any where. Also don't we have enough shopping centers & Industrial parks as well as apartment buildings to last a few years? The banks in my area are calling business to see if they can lend them money. Like one of my business associates said "Why would you want to expand your business in all the uncertainty over Cap & Trade ((An additional tax )) new Mandates for Health Insurance and huge tax increases for State & federal questionable expenditures.

Kirby

Nov 14 02:03 PM

[Gary A:]

Clearly demand is the problem, not supply. Summers thinks you can just reflate, stock up the banks with supply of money and all will be well. I think it is more complicated than that.

Summers is relying on exports to replace the US consumer. That is FOLLY.

Moral to the story, we should have bailed out the consumers instead of the banks. The banks won't buy a new car.

Nov 14 03:03 PM

[dingding:]

Bail out the consumers so they can spend beyond their means once again?


On Nov 14 03:03 PM Gary A wrote:

> Clearly demand is the problem, not supply. Summers thinks you can
> just reflate, stock up the banks with supply of money and all will
> be well. I think it is more complicated than that.
>
> Summers is relying on exports to replace the US consumer. That is
> FOLLY.
>
> Moral to the story, we should have bailed out the consumers instead
> of the banks. The banks won't buy a new car.

Nov 15 04:30 AM

[chris coonan:]

I am less interested in what Housing will do to the stock market, than to the overall economy. The fundamentals keep eroding, and it will be a long term problem. With people's net worth down, there will be less confidence, spending, hiring, and so on. The short term gains that have been made recently will evaporate without a recovery in real estate value.

Nov 16 02:54 AM

[chris coonan:]

Housing woes because of the Bank's. Bank's woes because of the stupidity of the bankers. Banker's bonuses on the backs of the people. People's misery at the hands of the banker's. Polititcian's guilt for letting it happen. Voter's revenge coming soon.

Nov 17 05:45 AM