FHA bailout on the way

After Fannie Mae, Freddie Mac and to some extent Ginnie Mae, it is now the FHA's turn to get a government bailout. Please consider:
Oct. 8 (Bloomberg) -- The Federal Housing Administration, which insures mortgages with low down payments, may require a U.S. bailout because it has $54 billion more in losses than it can withstand, a former Fannie Mae executive said.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today. Pinto was the chief credit officer from 1987 to 1989 for Fannie Mae, the mortgage-finance company that is now government-run.

The FHA program’s volumes have quadrupled since 2006 as private lenders and insurers pulled back amid the U.S. housing slump, Pinto said. The jump has left the agency backing risky loans and exposed to fraud in a “market where prices have yet to stabilize,” he said.
[My comment: when could wonder why private lenders and insurers have pulled back. Probably because mortgage rates at artificially low level do not reflect the current risk they would be willing to take to lend?]

Representative Maxine Waters, a California Democrat, said at the hearing it is a “myth” the FHA is the “next subprime.” West Virginia Republican Shelley Moore Capito touted the agency’s role in serving first-time buyers as it backs a third of loans for home purchases. She also said more consideration should be given to anti-fraud efforts and whether some consumers should pay more.
[My comment: Yes, right. Let's see what happens in the next few months...]

Falling prices will push the FHA’s single-family fund’s reserves below a 2 percent cushion above projected losses required by Congress, Stevens said last month. The shortfall will be cured in two to three years, he said today.

The idea the FHA needs a rescue is “just plain wrong,” Stevens said in an Oct. 6 letter to the Wall Street Journal. That’s in part because the FHA’s accounting method means its reserves are enough to cover more than 30 years of projected losses, assuming no revenue from new business.
[My comment: this is such a ridiculous statement that it removes all credibility from Stevens...]
Note that FHA is yet another example of unintended consequences and government interventions hazards.

Allowing people borrow a lot more than what they could in a normal market simply creates a financing bubble and is the source of rising home prices, that doesn't serve any buyer but only helps sellers. Thus defeating the very purpose of the FHA. This is exactly what happened with Fannie, Freddy, Ginnie and the housing bubble, in case anybody forgot that, now that the recession is over and the S&P back at in the thousands points.

Of course, when you only require to put in a 3% downpayment maximum (down to 0% if you include the $8,000 tax credit for home priced at less than about $260k-280k), you simply create a moral hazard since there's a huge incentive for borrowers to walk away as soon as they mortgage becomes 'underwater'.

From Wikipedia:
The Federal Housing Administration (FHA) is a United States government agency created as part of the National Housing Act of 1934. The goals of this organization are: to improve housing standards and conditions; to provide an adequate home financing system through insurance of mortgage loans; and to stabilize the mortgage market.
Following the Subprime mortgage crisis, FHA, along with Fannie Mae and Freddie Mac, became the source of much of the United States mortgage financing. The share of FHA mortgages went from 2 percent to over one-third of mortgages in the country. Without the subprime market, many of the riskiest borrowers ended up borrowing from the Federal Housing Administration, and the FHA could suffer substantial losses. Joshua Zumbrun and Maurna Desmond of Forbes have written that eventual government losses from the FHA could reach $100 billion
A borrowers downpayment may come from a number of sources. The 3.5% requirement can be satisfied with the borrower using their own cash or receiving a gift from a family member, their employer, labor union, non-profit or government entity.

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