Bailout Nation: The US Federal Housing Administration is in trouble

Mr_Mumble

This is crazy stuff. Front page of the Wall Street Journal on Friday (the bears are snoozing!)


For those not au fait with the FHA:

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%.

But don't worry about that 3.5% folks:

Though ostensibly they require a 3.5% downpayment, there are any number of ways around that. The $8,000 tax credit has only exacerbated the problem. Many local government programs allow for the tax credit to be used for a downpayment. Moreover, FHA allows for downpayment gifts from family members and certain other parties. It doesn’t take a whole lot of imagination to figure out that you can go to dear old dad and get him to fork over $8,000, sign a piece of paper that says it’s a gift, use that to buy the house, get the refund from the treasury and hand the money back to from whence it came with nobody being the wiser.

Effectively you can get a loan of >$225,000 with no money down once you take into account the tax credit, wonderful, this couldn't possibly go wrong!

Perhaps the FHA is a tiny part of the market and nobody has noticed the 'amazing' deals it offers, from the WSJ's follow-up report:

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

This is the kind of explosion in lending that Northern Rock had. Surely they're lending now when house prices have fallen dramatically so the borrowers won't have negative equity and can afford payments?...

At the end of June, some 7.8% of FHA-backed loans were 90 days late or more, or in foreclosure

By comparison 3.9% of Northern Rock's loan book is nonperforming. :rotfl:

So, how much does the FHA insure?

FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.

Yikes, so right now they've got $49bn of nonperforming loans, they've massively increased their loan book and brought on more sub-prime borrowers. Don't worry the FHA have released a statement that mirrors every financial institution in the months leading up to its demise:

“FHA continues to hold more than $30 billion in its reserves today, or more than 5 percent of its insurance in force,” FHA Commissioner David Stevens said in a statement. “Given this reserve level, FHA will not need a congressional subsidy even if the congressional capital reserve calculation falls below 2 percent.”

Hmm, that view isn't supported by experts in the field:

"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."

Forget all this bluster from the experts and journos though, perhaps those working in the US mortgage industry think the FHA are safe, let's look at the WSJ comments section:

I'm a real estate appraiser. When Fannie went broke, FHA was sent in to pick up the slack. They have been the new pin cushion for the last 18 months. The same swarmy mortgage brokers and lenders who use to do subprime and Alt-A went broke and re-named themselves and affiliated themselves with FHA. They are the same lenders who would put their own mother in a adjustable rate mortgage that created negative equity.

So, full disclosure here...I work for a VERY large bank. We never made these crazy loans in the past (at least directly)...Then all of a sudden FHA starts making them, so guess what the mix of our business is now? About 75% FHA...all loans we wouldn't make before but because we can sell most of them at a 5% discount it's more profitable to make these bad loans and sell them off to FHA plus we get our money now instead of waiting for the payments to come in. Amazing, people don't learn. We're in big trouble, time to start shorting banks again because when FHA dries up so does a very large chunk of bizz the banks have been doing the last 6 months.

I attended a real estate seminar in San Diego a couple of months ago. The real estate agent presenting was very excited because she was getting just about anyone into FHA mortgages with 3.5 % down. She was even more excited because people with bad credit were getting loans! And she had even better news for people with bad credit and no money: she could help them get in with NO MONEY DOWN because the 3.5% could come from friends, family, charities, and even the gov't incentive payment! She was ecstatic. Said she could get anyone into the room into a house. .

:eek:

ManAtHome

Even better if you were** buying in California - they seem to have found a few bucks down the back of a Hummer. You could get up to $3,333 a year tax cedit over 3 years if buying a new-build (as well as the Federal $8,000 for FTBs).
http://www.newhomessection.com/blog/10000-tax-credit-for-home-buyers-in-california/2009/02/21/

**Supposed to run until March next year, but they've run out of dosh (was for first 10,000 homes only).
http://www.reuters.com/article/gc03/idUSTRE57N5QZ20090824

HAMISH_MCTAVISH

So all you've done is prove the point that governments will do whatever is needed to stop the slide in asset prices. (and it's working, too)

Bailouts-a-plenty, printy printy, but at the end of the day, it has to be done.

Mr_Mumble

Oh Hamish, why are you so self-centered to be blind to all the future misery these bailouts will cause? Either the US government will default or future generations will be tax-slaves paying off this debt. This isn't debt brought about by a great social need such as stopping starvation, defeating Hitler or keeping a roof over peoples heads. Its an attempt at maintaining the property-ownership bubble, utter folly.

kabayiri

The interesting subtext to this story is the adage 'old habits die hard'.

Real Estate brokers in the US returning to 'sell at any means to anyone for profit'; 'Bankers over here expecting bumper bonuses after a one year blip'. It's clear that for some people they expect the pre-2008 economic world to return, a world financed once again by cheap credit.

Whether this is sustainable is debatable. Much of this credit will come from Eastern creditors, who may be less keen to lend in future.

What is clear is that we in the UK have avoided much of the bad medicine this recession could have brought. We have bought ourselves out of that happening. For many, this will mean the return of some poor financial habits in the future. All good news for the money men I'm sure....

Mr_Mumble

and bump because the Washington Post is reporting:

FHA's reserve fund hits 7-year low
Agency's cash running low; automatic bailout possible if loss continues

FHA's reserves were $10.04 billion as of June 30, the lowest level in nearly a decade, according to agency data. Seven years ago, the fund had twice as much cash. It remains in the black only because it has accrued interest.

More recent data, due to be released in an audit this month, will show that the reserve fund fell below the federally mandated level as of Sept. 30 for the first time since the fund was set up, agency officials recently said. The excess money in that fund is no longer enough to cover 2 percent of FHA's outstanding loans, as required by law.

This year's audit was scheduled to be released on Wednesday but FHA abruptly delayed it, citing problems with financial-stress tests it had requested that went "above and beyond" what the audit typically entails. Agency officials declined to detail the nature of these problems.

The troubles with the FHA are on top of last week's $19bn quarterly loss for Fannie Mae and $6bn quarterly loss for Freddie Mac.

Generali

It's ok, just add it to the bailout bill

lemonjelly

The first post on this thread is frightening in many ways. If I may say Mr Mumble, brilliantly & eloquently explained.

Post 4 (your second) is also an excellent post if I may say.

I'm sure I'm not alone in thinking there is more bad news to come out. It's just a question of timing.

Now, if what happens in america usually happens here 3 months later, what does that mean for the UK?
:eek::eek::eek: