FHA – “We are Officially Broke”

An interesting item in the Federal Register. This notice: (Link to FHA/FR)

SUMMARY: A recently issued independent actuarial study shows that the Mutual Mortgage Insurance Fund (MMIF) capital ratio has fallen below its statutorily mandated threshold.

We can pretend that that the FHA does not need a bailout, but it does.
Unlike its bad siblings, Fan and Fred, there has never been a question
whether Uncle Sam is on the hook with FHA. We don’t need a fancy
conservatorship this time. Tim Geithner over at Treasury will just write
the checks to cover the shortfalls. The good news is that those debts
will not show up on the Federal balance sheet. They don’t count because
there are “assets” behind these loans.

The Notice would appear to be a requirement of some sort to solicit
public opinions on policy changes at FHA. The proposed changes would
(supposedly) address the high default rates that the FHA is
experiencing. What have they proposed to achieve this? Surprise
surprise, they are going to instill some sanity into their lending
program.

This kills me. I, and a hundred others, have been writing and screaming that FHA was just a ‘bailout to be’
for a few years now. This was an easy call. FHA was making 96 ½% LTV
loans to borrowers with low FICO scores. They did this in a period where
RE values fell by 25%. Their business plan was, “How To Take a Bath on the Tax-payer Dime”.

Don’t look for these changes to come anytime soon. I suspect that this
will not evolve to a point where actual adjustments are made until after
the next election. But these changes are coming. Real equity of 10%
will be required for borrowers with low credit scores. There will be
restrictions on seller equity, or “concessions”.

My read on the proposals is that the FHA is getting out of what I call
“Silly Lending”. If they actually do take these steps it will mitigate
future losses. It will also sharply restrict the availability of
mortgage credit. Similar steps are being taken by F/F. The
implementation will be felt this fall. By spring time mortgage land
could look quite different. The D.C. lenders are 95% of the mortgage
market today. There are no willing private sector lenders. If Washington
steps back RE will get illiquid.

Central to our problems is the fact that for many years a social agenda
and lending standards were mixed. The goal was admirable. Make mortgage
credit available to all so that everyone could enjoy a leveraged bet on
home appreciation. What a terrible bet the feds have financed. There are
very few winners in this story. I read the following as a mea culpa. I
think FHA accepts that bad lending standards have ended up hurting those
they intended to aid. And along the way it hurt all of America’s
homeowners.

Given
FHA’s mission, allowing the continuation of practices that result in
such a high proportion of families losing their homes represents a disservice to American families and communities. It is FHA’s intent to eliminate this portion of its business, and utilize other established methods to reach and support these families.

In the end the mortgage mess will cost us nearly a trillion. A very big
price. For that tab we should learn a lesson. Soft lending to achieve
broad social goals is a mistake. Tell that to Barney Frank. This was his
dream.

Comments

[callistenes]

Too funny there is an adsense ad for a fha loan on this when i look at it.