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  • Why FHA Loss Can Be Good News For Fannie Mae Investors? 0 comments
    Jun 6, 2013 5:26 PM | about stocks: FNMA

    On May 29, a letter of a congressional committee revealed that FHA's traditional mortgage business had a projected deficit of around $13.5 billion, and the agency as a whole had a projected deficit of $16.3 billion. The White House in April said the FHA will likely need a $943 million cash infusion to cover losses on loans it insured.

    An open question is being raised: whether the FHA needs to play a smaller role in the housing market, and if it should tighten the standards on the loans it insures in order to avoid losses. Republicans have worried the FHA could turn out to be a burden on taxpayers.

    Meanwhile, it is noted that Fannie Mae has turned to a cash cow for U.S. Government by wiring a total of just under a hundred billion dollars to the U.S. Treasury.

    This stark contrast of huge FHA-loss and FNM-profit invites a serious question about the three scenarios of Fannie Mae's future contained in the Report to Congress from US Treasury, entitled as Reforming America's Housing Finance Market, in February 2011. The three options set out therein have one thing in common: to replace the pre-crisis hybrid public-private partnership model of Fannie Mae with a Berlin firewall between private capital (so-called privatized system) and public interest (to be taken up by FHA). The rosy underlying assumption is that private sector will be silly enough to come into the volatile water of housing system, which will continue to be heavily regulated.

    The fact of the past few years has already cast considerable doubt: due to the lack of private sector interest, Fannie Mae's market share cannot be easily and effectively reduced. Instead, its market share has demonstrated a tendency of increasing.

    Now, even during the good time, FHA can incur enormous loss from its insurance business, and taxpayers will be the sole resort to absorb such loss. This should serve as a wake-up call to those who are holding the hope that FHA could be less burdensome than the pre-crisis Fannie Mae. It should also be reminded that Fannie Mae is able to pay back to taxpayers in full, while FHA will probably not.

    Given the new facts, the far-sighted and well informed senators will unlikely endorse any of the three options proposed by the previous Treasury, since these could put the cost burden solely on taxpayers' shoulders. The "best" option of separating public interest and private sector will likely be removed from the table.

    The most likely bipartisan compromise will be the politically least painful one, which can also be accepted by private investors: the hybrid public-private partnership model of Fannie Mae as developed through the wisdoms of the past 70 years.

    ­­

    Disclosure: I am long RDN.

    Themes: Mortgage market Stocks: FNMA
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