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CBO report – “FHA ripping off taxpayers by $5 billion a year!”
When Fannie and Freddie went down for the count way back in 2008 their
(then) little sister, FHA, stepped up to the table in a very big way to
fill the void. They succeeded. The FHA book of guaranteed
mortgages has exploded since those dark days. From 2007 when FHA had a
lousy $50b in new annual issuance they jumped seven fold to $350b in
2009. Where they once had a sleepy 2% market share of US mortgages they
now have a very impressive 18%. Their total book of mortgage risk has
grown from $427b at the end of 2007 to a very lumpy $1.05 Trillion three
years later.
It’s hard to look at those results and call it anything but a screaming success. FHA has been the fastest growing financial institution (by asset size) in the world for the past three years. Way to Go!
But now the bad news. The folks over at the CBO took a
look at all this. They did an analysis that looked at how FHA values its
book and compared it to Fair Market. Why on earth would the CBO do
that? No other financial institution (public or private) has to measure
their book based on fair value. So why look at FHA on that basis? Simple answer. The CBO thinks that fair value versus the FHA accounting is a good proxy for the imbedded losses at FHA. From the report:
FHA’s mortgage guarantees expose the government (and ultimately taxpayers) to a significant amount of market risk.
FHA offers guarantees on mortgages with high loan-to- value ratios, which makes the likelihood and severity of defaults very sensitive to even moderate declines in housing prices.
If
losses from defaults increase, the increase is likely to occur when the
overall economy is weak and the cost of resources to cover those losses
is high—a risk that would be reflected in fair-value estimates.
The full analysis by CBO is here (link). You can draw your own conclusions. I’ll cut to the chase and give you the last sentence:
The difference (between FHA and fair value)—1.5 percent of the initial loan amount—is the fair-value subsidy rate for the program.
At a rate of $300b+ of new business a year the FHA subsidy is pushing $5b a year.
In its annual report the FHA proudly showed this chart of the cumulative issuance of Ginnie Mae securities (FHA gteed loans). The total is a whopping $3.7 Trillion. If the 1.5% subsidy is applied to the entire book of business it comes to $55 billion. Anyone wonder why we are going broke?
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1.5% is what the buyer pays up front to FHA to get the loan. Wake up
This general pattern happens again and again:
1. Government offers underpriced insurance as a way of subsidizing some industry. This is appealing because it involves no immediate out-of-pocket expenses for Uncle Sam.
2. The cheap insurance encourages risky behavior. Government doesn't increase premiums to reflect the increased risk.
3. Participants pocket large profits from the risky behavior.
4. Eventually everything blows up and the government is left holding the bag.
For example, consider the S&L crisis of the late 70s/early 80s.
Whenever you hear of a plan for the government to provide insurance, red flags and alarms should go off. But people never learn...
Interesting that you speak of gov't insurance, and above your comment is the Japan nuclear situation. It is gov't insurance that "caused" the Japanese reactor problem: When reliance upon private insurers is sought for a nuclear plant, the rates are too high due to the liabilities (yeah, I know, Duh). So.... the gov't steps in and insures them. Which scenario do you think is going to produce the SAFEST plants? The private insurer is going to demand very strict parameters, whereas the gov't just relies on its ability to pay claims.
Oops.
FHA has to stand in line...my kids and grandchildren are ripping me off now....
Japanese governments FAQs for People Living Outside the Fukushima Evacuation and In-house Evacuation Areas
Click the link below to read an incredible work of misinformation that will surely--at a future point in time--become forensic evidence used in a lawsuit against TEPCO and the Japanese government for criminal negligence.
By using this document, the Japanese government is trying to talk down the Fukushima problem and assure people that there is absolutely nothing to worry about, which we know is total hogwash because even small dosages of radiation are said not to be safe (and the dosages Japanese are getting are NOT small). Some of the goggle translated 22 FAQs and answers include (read here):
http://fukushimadisaster.blogspot.com/2011/05/japanese-govts-faqs-for-pe...
Are Hawaii, Cali, Oregon and Wash still getting showered with radiation streaming over from Japan?
Please God; hit the phukkin reset button.
So, with government mortgage backing and the Fed buying mortgage paper, is it fair to say that a second downturn would "bankrupt" our government? Is our whole society now dependent on avoiding a second downturn? (I admit to not being the most educated on what the Fed holds.) If so, that's scary stuff.
yes the arrival of double-dip will indeed finish off Government, the FDIC, FH friggin A, Fannae Freddie and Ginnae, the Fed, TBTF, education, healthcare and your military budget
...it all needed sorting anyway and those diseased turkeys in Washington were never going to vote for Christmas
Govt: These aren't the Mortgages your looking for....
Sheeple: These aren't the Mortgages we're looking for....
Govt: We can go about our business....
Sheeple: They can go about their business....
Govt: We can move along....
Sheeple: Move along...Move along....
I'm a Goldmansaxian. Jedi mind tricks don't work on me. Only money...
ZH Server repeat fuck-up
I knew Alec Guiness was behind this thing from the beginning......
Hey Bruce, you forgot this graph:
http://2.bp.blogspot.com/-8LVw3-YXt_A/TdWj8nQyUkI/AAAAAAAAQ1w/wGI39TSyuj...
I find this stuff just for you Republican cocksuckers who became instantaneously blind to budget problems when Reagan and Bush were raping the country, And you can read more here:
http://www.cbpp.org/cms/index.cfm?fa=view&id=3490
Where was Paul Ryan when this was happening?? No doubt powdering his nancy boy face in the ladies restroom.
Why be so shrill shill ?
Got those talking points from the C.A.P. via the Atlantic?
Feed the fascist machine with a classic left/rigth false flag attack.
This pilot test of "Fishing for Teabaggers Who Can Read" has now concluded.
tabulated response: 1
The rest just ignored you Troll. "They" win we they can get us to frame the problem as a left/right divide instead of a right/wrong divide.
Me thinks the laydie doth protest too much! An idealogue with a one
track mind. Kind of like Bin Laden...my way is the right way and all others false.
TedK performed a public service. The article that he links to is important. Knowing how we got here, and knowing that we have the SAME cretins in office, is vitally important. They will do the same thing, or worse. Looking at the past records of the people currently holding office helps one look past the rhetoric and see the end game. Don't count it all toward partisanship. The article presents a course of action that must be started now, with the current crop of Congress Critters. All of them are guilty, of course, but they are STILL there! We have no one to blame for that except ourselves.
geez, why the suprise? a government entity is ripping off the taxpayers. nice clue dick tracy.
as to ted k, look dude, it would help your outrage if you would automatically assume that all politicians are morally equal somewhere between child molesters and necrophiliacs.
I'm of mixed mind about this. OTOH high LTV in an unstable economic situation is dangerous, OTOH if you don't offer those loans then sales fall and with them prices. That triggers more defaults and that costs the Treasury too.
That which cannot be sustained...won't. Artificially inflated prices resulting from economic distortions such as government subsidies will ultimately seek equillibrium, no matter how hard we try.
You are talking one-time costs, versus a moral hazard gift which keeps on giving (read: costing). It is going to cost either way, let's take the pain, and get it the "F" over with.
Agreed but is a person making $50,000 unable to sustain a $100,000 mortgage? Do we really need to require them to have $20,000 cash before they can buy a house?
If we overshot valuations on the upside during the bubble due to poor government policies does that mean we have to also undershoot valuations on the downside by adopting equally poor government policies?
Let's put it this way, I'm a lot more comfortable offering a government guarantee for a home loan where documented income and debt levels indicate a capacity to comfortably support that loan rather than give an 18 year old kid a $100,000 in student loans in the hope that in the future he will have the income to repay it.
"Agreed but is a person making $50,000 unable to sustain a $100,000 mortgage?" -- Probably, because the higher priority expenditures are one's healthcare and retirement funding so as to never become a burden on others (taxpayers).
"Do we really need to require them to have $20,000 cash before they can buy a house?" -- Yes, why is 20% an unreasonable amount of skin in the game? Why should taxpayers carry risk of loss via GSEs or insured bank deposits funding these loans with less than 20% equity? 20% can easily get wiped out (as we have seen). And what hardship is there in saving for a house (understanding personal responsibility and delayed gratification are totally out of vogue).
What you call "undershooting" was considered normal good lending practices for many decades. Comparing it to a lousy student loan does not justify making a lousy home loan.
Sangell
anything subsidised or guaranteed by the Govt is a perversion of the free market. I would of thought it patently bloody obvious by now what a shambles Govt intervention has made of the US property sector (see Fanny, Freddie and Ginnae)
The person making $50K might be able to sustain the $100K mortgage. The person making $50K but with a $20K down payment has an actual history of being able to save, i.e. to set the future goal ahead of the present want.
The student loan thing is a silly comparison. Just because generous student loans are really dumb, doesn't make $0-down loans smart. And that's reflected in the fact that student loans can't be cleared via bankruptcy; there's no way out. So the collateral for a student loan is tremendous - the rest of your life in hock if you aren't smart enough or get the wrong degree.
Bruce,
Great piece. Simply another hidden taxpayer prop for home prices which is not sustainable. Will we ever learn?
This just out, FHA issued report stating CBO wastes $6 billion a year in taxpayer money stating obvious.
What? ONLY 5 billion per year? What a bunch of pikers!
You wanna some class fraud that means sumthin'?
http://www.nakedcapitalism.com/2011/05/former-lps-employees-allege-30-to...
Multiply by the number of counties in this country and 5 bilions will look paltry!