Is the FHA a Bailout Waiting to Happen?

Includes: FMCC, FNMA, WFC
by: Adam Sharp

Agency Gobbles Up Risky Mortgages in ‘09

The FHA has effectively replaced sub-prime lenders who went bust. They’re under pressure to prop-up housing prices, and are insuring heaps of risky loans in an effort to do so. Their guidelines are slipping and loan-volumes are skyrocketing. Delinquencies are skyrocketing too, reaching 14.4% in the 2nd quarter of 2009, according to the NYT (borrowers at least one payment late).

Even more shocking is this number: In 2009 FHA has insured 23% of all new mortgages. That’s up from 2% in 2006 (source: LAT). That spells big trouble down the road. FHA loans have gone from being a small piece of the market with conservative guidelines to Countrywide-reborn.

This screenshot (taken 9/18/09) advertises loose FHA Loan policies. They highlight “easier qualifying guidelines on FHA loans” and “flexible credit and income guidelines“.


It looks straight out of a Countrywide commercial circa 2003, but I assure you I took it Friday. Hard to believe we’re using these tactics again already. Can we at least get a little break between bubbles? “Easier Qualifying Guidelines”? Seriously?

Here’s another example of FHA-backed loans, from Wells Fargo (NYSE:WFC) this time (screenshot also taken 9/18/09) :


Notable: “Flexible income, credit and debt guidelines, including non-traditional credit histories, incentives for public employees"

Wells Fargo is offering “incentives for public employees”, as part of a government-loan guarantee program? That seems…off. Not to mention the line about those with “non-traditional credit histories”. Translation: “Even if you’re a questionable borrower, we can probably work something out. After all, we’re not going to eat the loss.”

Quick FHA Rundown

The government agency does not lend directly, but stimulates demand by insuring loans. FHA takes all the risk, while borrowers pay a premium to cover losses. Lenders get a sweetheart deal with almost zero risk. Yet another method of shifting private risk onto the public under the guise of “providing capital necessary for growth”.

New Commissioner says No Bailout Needed

The agency’s new commissioner, David Stevens, claims they can avoid a bailout through reform. From LAT:

The FHA does not plan to raise mortgage insurance premiums, he said. Instead, it is trying to reduce its risk of future losses. The agency proposed new rules that include requiring lenders to have at least $1 million in cash and other assets, up from $250,000, to limit losses passed on to the FHA. It will cap refinancings at 125% of the current home value and stop certifying mortgage brokers to issue FHA-backed loans. The agency also will appoint its first chief risk officer.

No mention of tighter borrowing standards? I suppose responsible lending would spoil the “housing recovery”. And why are they only now hiring somebody to monitor risk? Seems like a pointless gig anyway, since the goal seems to be taking on as much risk as possible. The leap from 2% to 23% of the entire mortgage market is a truly remarkable increase. It seems impossible that they could make such a jump and maintain any sort of decent lending standards.

The FHA has become yet another tool for propping up a tired housing market with public-backing. The CBO thinks bailing-out Fannie (FNM) and Freddie (FRE) will cost $400b. If FHA is allowed to guarantee these risky loans much longer, the bill for their rescue won’t be pretty either.

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