As the Federal Reserve proclaims that the housing market approaches $4 Trillion in negative equity it seems an inopportune time for the Federal Housing Administration to issue its latest press release denying that it will need a taxpayer bailout. The FHA stated that several recent published assertions including that of Moody’s Analytics speculating that a bailout may be imminent were nothing more than myth.
Their announcement was issued in spite of the increasingly tenuous position the FHA finds itself in, comparable or worse than that of Fannie Mae and Freddie Mac before they became insolvent and subject to government conservatorship in 2008. The FHA which has accounted for nearly one third of all 2011 and 2012 residential mortgages is severely under-capitalized and over leveraged.
It has nearly $1.1Trillion+ in outstanding loan guarantees, up 10% year over year. It has a capital ratio of .25%, less than that mandated by Congress of 2%. The $1B Attorneys General and other mtg put back Settlements with major banks will leave their capital reserve position well under .5%. Recent attempts to raise guarantee fees for FHA capital reserves were muted by Administration’s insistence that most of the increase be diverted to support its latest round of payroll tax cuts.
Corresponding with its low capital reserve level meant to protect it from future loan losses, the FHA is plagued by a rapidly increasing delinquency rate. “The serious delinquency rate was 9.8 percent in January, up from 9.6 percent in December and also up from 8.9 percent in January 2011.” (here)
This serious increase in delinquencies accompanies a housing market which faces ongoing housing price declines.
The price of homes declined on national basis by nearly 4% in 2011 and depending on the estimated one relies upon is projected to decline by 1 – 4% in 2012. This will place increasing pressure upon diminished capital reserves.
Yet despite the financial stress of this agency and the continuing price declines in the housing market, the FHA continues to do loans that are 95% of residential home values and in many cases to borrowers with questionable credit. They do so inspite of many established studies suggesting that the greatest single predictor of future mortgage delinquencies is negative equity.
Why are these policies currently in place at the FHA when they were widely blamed for the subprime housing finance collapse in 2007? And why do they remain in place despite Obama’s recent SOTU assurance that, “I will oppose any effort to return to the very same policies that brought on this economic crisis in the first place”?
Given the severely depleted capital reserve position of the FHA, falling home prices, diversion of FHA quarantee fees and Administration’s reliance upon pre-crisis lending policies, it is only a matter of time before the FHA follows Fannie Mae and Freddie Mac’s precedent of requiring taxpayer assistance. And if that is not the case, why is Congress considering the FHA Solvency Bill which co-sponsor Republican Representative Biggert suggests provides HUD with “emergency tools to protect the solvency of the FHA.”
The FHA public relations effort promotes the myth of fiscal prudence while it is simply a matter of time before the FHA calls for taxpayer assistance.
Pete the Banker is, uh, a Banker. He’s a regular contributor to the Victoria Taft blog and wishes to remain anonymous considering what the libs do to outspoken conservative businessmen around here.