Victoria Taft Blog Banking/Mortgage Guy, “Pete,” fills us in on what looks to be the next governmental entity to swallow the mortgage market. But don’t worry, you’ll just get the bill again.

“Pete” writes: In response to the housing and residential capital market collapse, the Housing and Economic Recovery Act of 2008 was passed in July, 2008. Through this legislation the Federal Housing Administration expanded its role in housing finance as troubles mounted for Fannie Mae and Freddie Mac.

As is suggested here, and here, the Congressional mandate to the FHA was to loosen underwriting standards , permitting borrowers with poorer credit to finance/ refinance homes with little down payment and out of pocket cost. Sounds a bit like the Congressional directive to Government Service Entities Fannie Mae and Freddie Mac, who beginning in 2003 – 2004 in contributed to the housing boom by originating and securitizing sub prime loans and ultimately the setting the stage for the residential capital market collsapse in 2007. A bit of deja vu?

Excerpts from Street Wise article,

“Additionally, FHA has been the recipient of a Congressional blessing to assist with the refinancing of hundreds of thousands of subprime and other exotic loans extended to borrowers who can’t (or wont) make their mortgage payments. Through the Home Affordable Modification Program, the FHA will refinance these troubled loans by reducing the balances of the loans by as much as 30%.”

And,

“HUD’s Inspector General issued a report recently indicating that FHA’s default rate has risen to 7% which is more than double the level considered tolerable for lenders. Moreover, the report found that 13% of the loans were delinquent by more than 30 days. Because of these facts, the FHA’s reserve fund has been reduced by more than 50%, going from 6.4% to about 3%. Why is a 33 to 1 leverage ratio ringing a bell to me?”