This should come as no surprise. When private lending got out of financing risky mortgage loans, the FHA stepped in- and now they are at risk of running out of money:
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.
It isn’t clear how the rising losses may affect home buyers. 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. Agency officials say if there is a shortfall, they don’t have to do anything except report it to lawmakers. But 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."
One of the commenters on this Wall Street Journal article, Doug in Des Moines, had this to say:
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.
Do you smell another bailout in the offing?
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twist -
If the Fed buys any more MBS its balance sheet’s gonna blow up like a fugu.
But who else is there? (Igor’s “confused”)
Moin from Germany,
no wonder Gold is doing fine…….
Amazing to see that almost nothing has changed…… Moral hazard is working overtime…..
YES, WE CAN´T….
WASHINGTON (Reuters) – The head of the U.S. Federal Housing Administration said on Friday the agency would not need a congressional subsidy even if its capital reserve ratio fell below the 2 percent demanded by Congress.
“Even if that level falls below 2 percent, 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.”
Lenders have overlayed guidelines over FHA guidelines. Splitting the risk between the lender and FHA should not create a problem. The effect of rising losses just will tighten guidelines towards a manual u/w. In today’s market the models are automated and I have seen 60DTI (debt to income) being purchased without a blink. A human would never approve such loan.
http://www.reuters.com/article/ousiv/idUSTRE5833MQ20090904
Fannie and Freddie have already gotten their bailouts, and now the third leg of the federal government’s affordable home ownership fetish might need more money too: the Federal Housing Administration.
The FHA insures loans for first-time homebuyers, and its obligations could be staggering. The FHA insures loans with down payments as low 3.5%, but given the number of buyers who have wrapped closing costs into their mortgages in recent years, the true loan-to-value ratios may have been even higher.
Read More: http://www.housingnewslive.com
Reality is that 3.5% investment is gone before the key is turned over.
1.75% Mortgage insurance is tacked on to the loan and with 6% Realtor sales commission to unload homeowners are down right off the bat. Not to include the 1-3% housing monthly price declines that have and will continue to be seen well into the future. 1.75% is a small payment to make to transfer the risk to the FHA and Lender.
This is a great deal for the purchaser since it now has a “call option” on the home and if prices go down, no problem give the home back to FHA. No big deal since no real equity was lost by the buyer.
(most can live in their home mortgage free for 6-9 months to recoup that 2% down payment.)
It is the fools putting 10% to 20% down which take real hits. The 7% transaction commission and 15% yearly price declines will take 100% of the down payment away, poof This was real money.
No wonder 70% of loans are now FHA insured.
Just saw this picture at the WSJ. Congratulation, TX is #1!
“Behind FHA Strains, a Push to Lift Housing: Worry Mounts That Federal Agency, a Mortgage Insurer, Will Need a Bailout as Its Cash Dwindles and Role in Market Grows”, by Nick Timiraos, Wall Street Journal, September 5, 2009.