Tuesday, November 15, 2011

Remember in 2009 When the FHA Was Doing "Stoopid" Things and Claimed They Would Not Need a Bailout? Err...

Back in 2007/2008 I was harping on the disaster that was Fannie and Freddie - as they took step after step that pushed them into more risk.  [Feb 27, 2008: OFHEO Increases Allowance for Fannie Mae] [Mar 19, 2008: Fannie, Freddie Layered with MORE Risk]   We know how that turned out.  [Sep 7, 2008: Bailout Nation Continues - Fannie/Freddie Now Owned by You]

I then turned to the FHA - which I frankly have not written a piece about in at least 18 months.  Once a bit player in the mortgage market, this organization began doing a lot of "stoopid" things as well.  I had a litany of warning posts throughout 2009:

  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]
  7. Warning [Sep 18, 2009: Washington Post - FHA's Cash Reserves Will Drop Below Requirement]
  8. Warning [Oct 14, 2009: NYT - FHA Problems Raising Concerns of Policy Makers]
  9. Warning [Nov 18, 2009: Toll Brothers CEO: "Yesterday's Subprime is Today's FHA"]
  10. Warning [Nov 20, 2009: NYT - With FHA Help, Easy Loans in Expensive Areas - Barney Frank Pushes for Permanent Higher Limits, Approaching 1 Million]

The problems were very evident in 2009 - consider how loans the FHA were making that were 1 to 2 years old had already began defaulting at a rate of 1+ in 5!!:

  • A year after Fannie Mae and Freddie Mac teetered, industry executives and Washington policy makers are worrying that another government mortgage giant could be the next housing domino. 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.
  • (this was from a 2009 piece)  But he acknowledged that some 20 percent of F.H.A. loans insured last year (2008) — and as many as 24 percent of those from 2007 — faced serious problems including foreclosure, offering a preview of a forthcoming audit of the agency’s finances.

Why so bad?  Same issue as the subprime, alt A, blah blah culture.  Our oligarchs in the banking industry  [Sep 18, 2009: 3 Oligarchs Now Dominate Mortgage Market - All Backstopped by You]  originate the loan but have NO SKIN in the game as FHA is on the hook if things go bad (as insurer).
  • (from 2009) The number of F.H.A. mortgage holders in default is 410,916, up 76 percent from a year ago.

I wrote this in November 2009:

Replace the words 2006 with 2009, and banks with US taxpayer. We not only have forgotten the lessons of 20, 50, 80 years ago. We've forgotten the lessons of 1 year ago. But not to worry, I'm sure it will work out better this time around. I just want you to remember these people when you are asked to pony up taxdollars to fund FHA (although it won't be a bailout since they can borrow money directly from the US Treasury Dept without asking Congress)

Good timing from this gentleman, again from late 2009:
  • “It appears destined for a taxpayer bailout in the next 24 to 36 months,” Edward Pinto, a former Fannie Mae executive, said in testimony prepared for the hearing.

Checking in with Barney....

  • Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it.  “I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

Here are some quotes from a 2009 story from the borrowers themselves - note how some are amazed the government even loaned them money.

Borrower #1
  • Is Ms. Shimon a good bet? Even she has no easy answer. Her mortgage payment, $1,100, is half of what she takes home every month. It is not easy to make ends meet. Teachers can get laid off like everyone else. 
Love this quote from Ms. Shimon, I did not know it was government's obligation to take risk on people.....
  •  “The government,” she said, “is doing what it needed to do — taking a risk on people.

Borrower #2

  • Chaz Fullenkamp, an automotive technician in Columbus, Ohio, got an F.H.A. loan even though he was living on the financial edge. “If I got unemployed, I’d be wiped out in a month or two,” he says. 

Borrower #3
  • “I knew in my heart I could not really afford the house, but they gave it to me anyway,” said Mr. Fullenkamp, 22.  “I thought, ‘Wow, I’m surprised I pulled that off.’

And we're surprised these defaulted at a rate of 1+ in 5, within 1-2 years of origination?  But again, if you can shovel of all the risk to the government and collect fees at go as an originating too big to fail bank - why not! It's 2005 all over again - woo hoo!

I could go on .... but what's the point.


Anyhow, this morning the WSJ reports that FHA's cash reserves have fallen so low there is a "close to 50% chance" the agency could run out of money and require a taxpayer bailout in the next year.   But the FHA does not even need to go through Congress so I guess it won't really be a bailout if no one hears the tree falling.
  • The Federal Housing Administration's cash reserves have fallen so low that there is a "close to 50%" chance the agency could run out of money and require a taxpayer bailout in the next year, according to the annual independent audit of the FHA's finances.
  • The audit, to be released Tuesday by the FHA, estimated that the value of the agency's reserves stood at $2.6 billion as of Sept. 30, down 45% from an already low $4.7 billion last year. The drop reflects the impact of rising home-loan defaults amid falling home prices, which together generate greater losses on the sale of foreclosed homes.

[click to enlarge]

  • The FHA's perilous state underscores one of the hidden costs of the U.S. government's extraordinary efforts to rescue the housing market. In the past four years, as private lenders have pulled back from the mortgage market, the FHA's market share has swollen. It backed one third of mortgages used to finance home purchases last year, up from around 5% in 2006. The FHA doesn't make loans but insures lenders against defaults on mortgages that meet its standards.
  • The report comes even as Congress considers returning the maximum FHA loan limits to higher levels. The limits fell modestly in about 600 counties on Oct 1.
  • The outsize role the FHA has played in the mortgage market has depleted its resources. Every year, independent auditors use a complex formula to determine the so-called economic value of the agency's reserves by making estimates about future losses and then subtracting that amount from existing reserves.
  • Using that measure, the FHA's projected reserves, which are set aside to cover future loan losses, accounted for just 0.24% of all $1.1 trillion in mortgages insured, as of Sept. 30. That is down from a 0.5% reserve ratio last year
  • Federal law requires the agency to stay above a 2% level, which it breached two years ago
  • Still, so far the FHA hasn't run out of money and hasn't needed any Treasury funds. That is in part because the FHA has repeatedly increased homeowners' insurance premiums to raise cash and enforced tighter risk controls.

So here is the "good news".
  • The report assumes that home prices will fall 5.6% this year before hitting bottom and then rising by 1.2% in 2012. Under that scenario, the FHA would avoid a taxpayer bailout and the agency's reserves would rise back to the 2% level required by law by 2014.
If that wonderful scenario does not play out?
  • However, there is close to a 50% chance that home prices could suffer greater declines, according to the report, generating larger losses and wiping out the FHA's reserves, forcing the agency to seek government funds for the first time in its 77-year history

But then here is more "good news" - no need to go through Congress!  Tim can write a check, and the taxpayer has no say.
  • Because the FHA has "permanent and indefinite" budget authority, it wouldn't need to ask Congress for money and could simply go to the Treasury.

  • Under a more pessimistic scenario that assumes a further 9% drop in prices in the coming year, the FHA would require a $13 billion bailout from the Treasury, according to the report.
  • Price declines of 16% and 20% would trigger infusions of $29 billion and $43 billion, respectively. "Just how much assistance might be requested would principally be a function of how much home prices fall in the near future," said the report.

And here is the catch 22 - Fannie, Freddie FHA are >90%+ of the mortgage market.  There have been no real steps to wean the housing market off the government teat and let the 'private market' take over - whatever that means in this day and age.  So the big dance is this.... without the FHA involved prices would fall farther.... and as you see above, if prices fall farther, the losses to FHA grow bigger.  So... it's all a big mess:
  • Without FHA financing, "we would have seen a much bigger downward spiral in house prices," said Peter P. Swire, who served as a top White House housing adviser until last year. "More people would be underwater."
  • Still, because many FHA borrowers have minimal equity to begin with (3.5% down is typical), they have little protection if home prices fall and they lose their jobs or run into trouble making payments. 
  • One worrying sign is that mortgage delinquencies remain high on FHA loans, even as they decline among most others. Around 630,000 loans backed by the agency were three or more months past due on their mortgages at the end of September.
  • Many of today's losses are coming from loans made in 2007, 2008 and early 2009. (Mark's note - give it time on the latter 2009/2010 vintage - it really requires some skill to start defaulting on a 30 year mortgage within the first 12-18 months.)   

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