Friday, September 18, 2009

Washington Post: FHA's Cash Reserves Will Drop Below Requirement

I'm early, I'm long, and I'm strong on the coming bailout for FHA. This will be my pet project after official after official denies any taxpayer support will be needed. I'm writing story after story and building a history - and trying to quote all our officials, although as in the piece I wrote earlier this month some prefer to go unnamed. [Sep 6, 2009: And So the Next Crisis Begins - FHA Loans Default in Increasing Numbers - 2% Threshold Threatened]

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%.


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."

Insert circus music here
  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]

Lo and behold, front page story in the Washington Post - the 2% threshold is about to be broken. Basically all we are doing is moving risks and subsidizations from under 1 shell to another, while talking up recoveries and prosperity; all bought and paid for by today and future generations taxpayers. Just so the housing market (and greater economy) cannot clear as it needs to. Remember, in America we only do "benefit - benefit" analysis; "cost - benefit" analysis is for dusty textbooks.
  • The Federal Housing Administration has been hit so hard by the mortgage crisis that for the first time, the agency's cash reserves will drop below the minimum level set by Congress, FHA officials said.
  • The FHA guaranteed about a quarter of all U.S. home loans made this year, and the reserves are meant as a financial cushion to ensure that the agency can cover unexpected losses.
  • The FHA, which is part of the Department of Housing and Urban Development, insures home mortgages against losses, thus helping prospective borrowers obtain loans. It uses the insurance premiums paid by these borrowers to pay for mortgage defaults. Since its creation in 1934, it has never used taxpayer money to cover losses at its flagship home-buying program. But rapidly rising defaults have burned through the agency's reserves, raising the prospect that it would have to take dramatic action.
  • An independent audit due out this fall will show that the agency's reserves will drop below the 2 percent level as of Oct. 1, the start of the new fiscal year, Stevens said. Although the reserves had remained well above the minimum required level during the housing boom, the audit last year showed they had shrunk to 3 percent as of Sept. 30, compared with 6.4 percent a year earlier.
  • Until now, government officials have warned that the agency could be forced to ask Congress for billions of dollars in emergency aid or charge borrowers more for taking out FHA-insured loans if the reserves fell below the required level, equal to 2 percent of all loans guaranteed by the agency.
  • Both options are politically unpalatable. Congress and the public are weary of bailouts after the government spent hundreds of billions of dollars rescuing banks; insurance companies; automakers; and the mortgage finance giants, Fannie Mae and Freddie Mac. Raising premiums for borrowers could increase the cost of buying a home just as a wounded housing market is showing signs of life.
Excellent; I have a new quote - FHA Commissioner David H Stevens; I'll add you to the list

"We are absolutely not going to Congress and asking for money for FHA," he said. "We're not going to need a special subsidy or special funding of any kind."

So how will we avoid bailouts (for now)? In yet another piece, this time in 2008 when I was discussing Fannie, Freddie - I warned about the FHA was rife with fraud. [Dec 11, 2008: Freddie, Fannie Considering Waiving Appraisals for Refinancing]

As for FHA? Cmon now... we are going from semi government (Fannie/Freddie) to fully government "efficiency"? Cripes.

  • ...some housing industry experts worry that F.H.A. may soon be hit by a wave of mortgage-related fraud and abuse that it is ill prepared to deal with.
  • Over the years, the Department of Housing and Urban Development, which oversees F.H.A., has been slow to weed out mortgage lenders that abuse or defraud the agency and profit through means like certifying unqualified borrowers. (the circle of life - isn't this how we got here in the first place?)
  • There are also growing concerns that subprime fraud artists have set their sights on F.H.A. “It looks like an incoming tsunami,” said HUD’s inspector general, Kenneth M. Donohue.
  • The fallout for both homeowners and taxpayers could be substantial if F.H.A. becomes the next housing domino to teeter.
  • And a HUD audit released this month suggests that fund may soon face trouble again; over the fiscal year, its capital ratio dropped to 3 percent, from 6.4 percent, reflecting a sharp increase in claims. By statute, that capital ratio must be at least 2 percent.

FHA has never had a risk control officer. A ridiculous situation but when FHA is 2-3% of the entire mortgage market I suppose a ridiculous situation we can just shake our head at. But when FHA becomes the majority lender in America? Not so funny. So as you read these "solutions" just chuckle slowly to yourself at how these things were never part of the program before. And let us just smile as the politicians of 2011 ask "how could of this happened" and "no one could see it coming".
  • He said he is planning to announce Friday several measures that should help the reserves rebound quickly.
  • For one, he will propose that banks and other lenders that do business with the FHA have at least $1 million in capital they can use to repay the agency for losses if they were involved in fraud. Now, they are required only to hold $250,000.
  • Second, he will propose that lenders also take responsibility for any losses due to fraud committed by the mortgage brokers with whom they work. (so you mean the lender who originates the loans and then quickly shuffles it into the arms of the taxpayer liability - FHA - will actually be asked to be responsible for the loan? My gosh... ground breaking stuff... lenders responsible for loans. I cannot wrap my mind around such an old school concept)
  • In an effort to reduce the risks faced by the agency -- and thus the potential for losses -- Stevens said he plans to hire a chief risk officer by the end of the year. The agency has never had one in its 75-year-history. (why bother? I mean as long as the taxpayer will cover the losses...)
That's it? Those are the solutions?
  • Though these changes were in the works before the FHA reviewed the new audit, he said the steps should help fatten up the FHA's loss reserves faster than projected.
But again, don't worry - mathematical models show that the housing recovery will fix everything. Of course these same models led to the downfall of the entire mortgage securitization market, imploding the US financial system and sending close to a trillion dollars worth of mortgages into the arms of the Fed as a "great place to hide them" - err, I mean to unclog the system. But I'm sure this mathematical model will work out - all it requires is for the taxpayer to send $8000 checks to other taxpayers so they buy homes to create a recovery, sort of like a Ponzi scheme. Except it's not "sort of". Oh yes, hundreds of billions must be spent by the Fed to keep interest rates down near 5% since the US housing "recovery" apparently implodes at a normal rate of 6%. [Jun 3, 2009: A Country that Cannot Function Without Easy Money]
  • The new audit shows that even without any new measures, the reserves will rebound to the required level within two or three years largely as the result of the recovery in the housing market, Stevens said.
  • This calculation is based on projections of future home prices, interest rates and the volume and credit quality of FHA's business. (i.e. the infamous "model" that never fails)
So in summary - as long as the housing market recovers... subsidized by taxpayer money with handouts to buyers .... and further subsidized with hundreds upon hundreds of billions of US taxpayer money wasted by the Federal Reserve to suppress rates, we won't have to bailout the FHA, using taxpayer money.

Well I for one am glad to hear that taxpayer money is not required! And no more bailouts are discretely being done via multiple measures that don't have the label "bailout". Wait a second here... Whose on first?

  • The FHA's financial health is in the spotlight in part because of its key role in buoying the housing market. The agency lost much of its relevance during the housing boom when home prices soared and borrowers raced to aggressive subprime lenders. But after the subprime market collapsed, borrowers flocked back to the FHA, the only option for those who lack stellar credit or hefty down payments. Its historic role in backing loans is more crucial now than ever.
  • It has captured 23 percent of all new loans made so far this year, up from just 3 percent in 2006.
So to reiterate - after the subprime market collapsed since banks could no longer slice, dice, chop subprime loans into tiny pieces, get the rating agencies to slap them with AAA ratings and sell them to suckers all over the world as "nearly risk free" yield - the market collapsed. We needed a new sucker. That sucker is us - via FHA.

I have another piece coming today showing how dependent the entire US housing market now is on the government. The fully subsidized economy, brought to you by the 'free market'. Recovery is here - bought and paid for.

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