Sunday, September 6, 2009

And So The Next Crisis Begins: FHA Loans Starting to Default in Increasing Numbers - 2% Reserve Threshold Threatened

Watching America act is like watching a driver on coke, swerving left and right, over the expressway at 120 miles per hour. We've said many a time that all we've done to create this "housing bottom" is institutionalize in the government the EXACT same behaviors that was done by the banks. Many of the first time home buyers who today have to offer nothing down as the $8000 tax credit takes care of their 3.5% down FHA loans + closing costs, will be the defaults of 2011-2013. But we really don't even have to wait that long; it has begun. FHA loans which were meant for 1st time buyers, and troubled credit now are going to almost anyone. It's share of the market has exploded.
  • In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance.
All we can do is shrug our shoulders and realize we are spitting in the wind - no one cares or listens as we wave our arms in angst.... we'll just constantly do bail out after bail out. No one seems to ask why this keeps happening. I only wish I could get a tax cease and desist for the future FHA bailout by professing I saw it coming. We should not be forced to pay if we said it would happen. This is going to be my Nouriel Roubini moment where I am going to take credit for being way ahead of the pack.

I am going to start keeping a track of this issue because what FHA is today is nothing compared to the crisis we'll see hit with hurricane force in about 30 months. This is not even the tip OF the tip of the coming iceberg - only the beginning... but now we see (as I predicted) why the Ginnie Mae CEO ran off into the night a few weeks ago - not a year into the job.
  1. Warning: [May 6, 2009: FHA - The Next Housing Bust]
  2. Warning: [May 8, 2009: Minyanville - Subprime Lending is Back with a Vengeance]
  3. Warning: [May 13, 2009: Tax Credit as Mortgage Down Payment Now Official Federal Government Policy]
  4. Warning: [Jul 6, 2009: WSJ - No Money Down or Negative Equity Top Source of Foreclosures]
  5. Warning: [Aug 12, 2009: WSJ - The Next Fannie Mae - FHA/Ginnie Mae]
  6. Warning: [Aug 14, 2009: Ginnie Mae CEO Resigns After 1 Year on the Job]

  • The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.
  • The rising losses at the FHA, part of the U.S. Department of Housing and Urban Development, come as the agency has rapidly increased its role in guaranteeing loans in an attempt to stabilize the housing market.
  • Options for the agency could include politically unpalatable choices, such as asking for taxpayer funds to boost reserves or increasing the premiums borrowers pay for the insurance offered by the agency.
  • .... some mortgage and housing analysts see trouble ahead. "They're probably going to need a bailout at some point because they're making loans in a riskier environment," says Edward Pinto, a mortgage-industry consultant and former chief credit officer at Fannie Mae. "...I've never seen an entity successfully outrun a situation like this."
  • Rising defaults have eaten through the FHA's cushion. Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, a figure roughly equal to the national average for all loans. That is up from 5.4% a year ago. (and this is with foreclosure mitigation plans, sponsored by OTHER parts of government - flying out the wazoo)
Trust me, that 2.4% increase we've already seen is nothing since FHA's share of 2004-2006 mortgages was tiny. The 2007 and especially 2008-2010 vintages are going to be the barn burners.
  • Federal law says the FHA must maintain, after expected losses, reserves equal to at least 2% of the loans insured by the agency. The ratio last year was around 3%, down from 6.4% in 2007.
  • If its reserves fall short, the agency is obliged to notify Congress, which could spark a commotion over the extent to which the government is funding losses in the housing market.
  • Critics have said the FHA, which has never had a chief risk officer, isn't able to manage such a large portfolio in an unstable market.
  • Policymakers have used the FHA to stabilize the housing market by pushing it to offer credit with far easier terms than that offered by most private lenders. For example, it will back loans with down payments as low as 3.5%.
  • The FHA is particularly sensitive to home-price declines because of the small down payments it will accept, which can quickly become wiped out by a fall in home values.
  • While most private lenders have raised lending standards and now require minimum 20% down payments, the share of borrowers who are able to make down payments of less than 10% hasn't changed in the last two years, largely because of the FHA, says Mr. Pinto, the former credit officer at Fannie Mae.
And please let us not forget who is ultimately responsible for changing the rules...
  • Before the boom, the FHA wasn't a big player in the housing business because it didn't follow private lenders in loosening its standards. Borrowers had to fully document incomes and insured loans were capped at $362,000. Congress increased those limits last year to as high as $729,750 in the most expensive markets.
Surprise, surprise - a financial model that is not working. Where have we seen that before?
  • Officials said as recently as May that they didn't expect to fall below the 2% limit, but home-price declines have exceeded those used to model their expected losses.
  • Given the pace of those declines, "there is no way they will make the 2%" if the current study follows last year's methodology, says Mr. Lawler.

I would like to have this man or woman's name:
  • A senior official at HUD, which oversees the FHA, said there is "no risk" that the FHA would require money from Congress if the ratio falls below 2%.
At least we have this guy's name, I want to compile these for my "lists of ridiculous quotes" we will compile in 2011.
  • HUD Secretary Shaun Donovan said in June, "there's a better than even chance that we will stay above the two percent reserve threshold. That suggests, not just for the 2010 business, but overall for the portfolio, that we'll more than likely to stay out of a broader need for any taxpayer funding."
Well time to begin a new blog topic; welcome to the club: "FHA"

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