Sep282013

FHA needs bailout as they run out of tricks

The rumor came out that FHA would need a bailout and experts said nonsense.   Their “expert” opinion didn’t even last 48 hours.

FHA is mandated to maintain a reserve fund for the mortgages that they insurance.  Just as a reminder FHA is government backed insurance agency for low down payment loans for first time homes buyers. After the bubble popped and defaults started occurring, the reserve fund, which had more than enough money in 2007, started to run dry.  FHA needed many new borrowers that would pay mortgage insurance premiums which help to replenish the FHA reserve fund.  To accomplish this conforming limits were increased and credit scores qualifications were loosen to attract a larger pool of  borrowers.  Even if you had a existing home if lived in it longer than 5 five you could qualify for a new mortgage. It worked so well that FHA soon filled in the role of the subprime lender and in some markets up to 30% of the newly originated home loans were FHA insured.   This was still not enough to stem the losses, so FHA starting to increase the mortgage premiums for new loans.  Also, they tried to sell to their non-performing loans to investors to reduce their liabilities.  Eventually, the FHA had to increase mortgage insurance premiums over 1.20% for a 30-year fix mortgage and make the insurance permanent over the life of the loan.  And these actions still didn’t prevent the bailout.

U.S. housing agency likely to tap Treasury funds -sources

By Margaret Chadbourn

WASHINGTON, Sept 25 (Reuters) – The Federal Housing Administration will likely soon seek a cash infusion from the U.S. Treasury for the first time in its nearly 80-year history to help it cover losses from souring loans, sources familiar with the matter said on Wednesday.

The agency, which offers private mortgage lenders guarantees against homeowner default, has nearly exhausted its reserves for the mortgages it backs. Housing officials have yet to determine how much money the FHA may need to draw, the sources said.

Losses on loans made from 2005-2008 as the market was heading south have eaten away at the agency’s cash reserves. While it is reaping profits from more recent mortgages, those profits are not expected to be large enough to make up the shortfall.

Many conservative Republicans have expressed concern that the FHA provided too much credit to unworthy borrowers during the housing crisis, and they cried foul on Wednesday.

Republicans and Democrats both loved this program, in sense they buying votes by guaranteeing subprime loans.

“The FHA has been going down an irresponsible path for years,” said Senator David Vitter, a Republican member of the Senate Banking Committee. “Instead of managing their funds responsibly, and making appropriate reforms, FHA prefers to lean on taxpayers to bail them out, and enough is enough.

The irresponsible path of was 3% down payment loans.  The borrower had no incentive to keep paying the mortgage if they were underwater with their mortgage.   Sometimes they had down payment assistance and put almost no money down.

The White House projected in April that the FHA would face a shortfall of $943 million for the fiscal year that ends on Monday, but the agency said it would wait until the end of the budget year to make a decision on whether to draw Treasury aid.

At that time, the FHA said it would see whether or not steps it took to raise funds and the improvement in the housing market would close its funding gap.

Whatever is the initial estimate of the bailout you can be sure that it is way under the final bailout number.

By law, the FHA is able to automatically access Treasury funds if it depletes it reserves, but it has never had to. In the past few years, it has taken a number of actions, including raising insurance premiums and tightening underwriting standards, to stay solvent.

Nice, how many small businesses out there get an automatic line of credit when they start losing money.

The government mortgage insurer plays a key role in helping those with low and modest incomes obtain credit to purchase a home. Consumer advocates maintain the support it has given to low-income borrowers and the housing market as a whole has been worthwhile.

That is not entirely true at this point.  A $729,000 loan in Orange County is hardly a loan for a low income household.    Again this program morphed to replace the subprime lenders or at least facilitate subprime type lending.

The FHA insures about $1.1 trillion in mortgages and supports 15 percent of all U.S. mortgages, up from about 5 percent in 2006.

It is legally required to keep a 2 percent capital ratio, which is a measure of the fund’s ability to withstand losses. It has failed to meet that threshold for a number of years.

A representative for the Department of Housing and Urban Development, which oversees the FHA, did not respond immediately to a request for comment.

Ironically, it was recent government policies that was a factor for the bailout.  As the government increased the mortgage insurance premiums more borrowers started to go to Fannie Mae and Freddie Mae, which were easing their credit standards.  As the supply of homes going on the market was suppressed this led to a shortage of homes for sale.   In addition the Fed Reserve’s Quantitative Easing lowered mortgage rates and which also indirectly allowed some hedge to borrow cheap money to purchase Single Family Residences as investment vehicles.  Finally, the introduction of cash foreign buyers increased the competition and home prices have rallied in 2013.  This resulted in the FHA borrower being out bid on these homes and if FHA can’t get new borrowers, it can’t get cash flow replenish the FHA Reserve Fund.  Something central planning didn’t foresee.

Mike