(Don’t act like we never told ya)
By Pete the Banker
“The New York Times reports that a schoolteacher in Colorado recently got talk into buying a $134,000 fixer-upper with only 3.35 percent down. To afford that Smidgen of equity, she liquidated her retirement savings. The bank rolled closing costs into the loan in return for a higher interest rate. Her monthly cost is 50 perce of her take home pay. “ Here.
The loan in question was a Federal Housing Administration (FHA) insured loan sanctioned under the Housing and Economic Recovery Act of 2008. The FHA’s capital reserve level is now below the statutory minimum of two percent of its portfolio. According to a recent article, “Subprime Uncle Sam” in the September 29th Wall Street Journal, here
At a 50 to 1 leverage ration, the FHA will soon have a smaller capital cushion than did investment bank Bear Stearns on the eve of its crash. It’s loan delinquency rate (more than 30 days in late payments) is now above 14%, or two or three times higher than on conventional mortgages. Its cash reserve ratio has fallen by more than two-thirds in three years.
The reason for this financial deterioration is that the FHA is underwriting record numbers of high risk mortgages. Between 2006 and the end of this year, FHA’s insurance portfolio would have expanded to $1 trillion from $410 billion.
Today nearly one in four mortgages carries an FHA guarantee, up from one in 50 in 2006. Through FHA, the Veterans Administration, Fannie Mae and Freddie Mac, taxpayers now guaranty more than 80% of all U.S. mortgages. Sources familiar with the new HUD report on FHA’s worsening balance sheet tell us the default rates have risen most rapidly on the most recent loans, i.e. those initiated or refinanced in 2008 and 2009.
The FHA’s main lending problem is that it requires neither lenders nor borrowers to have a sufficient financial statke in mortgage repayment. Borrowers with little down payment and few if any clsoings costs have no equity in the home nor financial incentive to save their property to if their financial condition deteriorates. Lenders protected by government guarantees bear little risk and simply extend or modify troubled mortgages or take back the secured hom. Why did Congress authorize the FHA under the Housing and Economic Recovery Act of 2008 to implement a loan program so similar to those of the failed CRA era? Given the massive delinquency levels displayed by sub prime loans, why is FHA pushing these loans despite its own accelerating portfolio delinquencies and the decline of its capital reserve? Will this program simply result in future mortgage market setbacks prompting additional federal government bailouts?