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Geithner To Bailout FHA?

Bruce Krasting's picture




 

 

 

So two days ago the WSJ runs the story that the FHA is soon to be in default due to a shortfall in its reserve fund. Sure enough, it's now official:

 

The government's finances are creating a three-ring-circus of events. I'm thinking to myself, "Where's the tent?"

Just a quick thought on the timing of FHA's bad news. This was "known" two months ago (or more). The leak, and the announcement, came a comfortable two weeks past election day. If you believe that's just a coincidence, well, I guess I have nothing to say.

The FHA says the shortfall in the books comes to a modest $16.3Bn. As bailouts go, that's chump change. It's small beer today, but next quarter there will be another shortfall as the "book" of nutty mortgage's works its way through (and steam rolls) the FHA. The losses being booked today (and next month) result from mortgage guarantees made back in the dark days of 2008 -09. These loans were programed to make losses. The chickens are coming home to die roost. I think FHA will need a line of credit for at least $50Bn.

Given that we are already on the brink of warfare in Washington over a bunch of money issues, the timing for FHA to go into the red is terrible. The Republicans must be peeing in their pants with glee over this affair. After all, FHA, is a child of the Democratic Senate. In the end, elder statesmen and learned stewards like Chuck Schumer (D-NY) were supposed to be keeping an eye out for FHA. Oh, well.

 

If you have an worries about FHA, and its ability to keep grinding out those ultra cheap 97.5% LTV mortgages, let me assure you that this will not be a problem at all. You can keep buying those high flying builder stocks, and maybe even buy a home of your own. The bottom of the RE market was a year ago already, right?

 

 

 

The problems at FHA are going to be swept under the carpet with no problems at all. In an ironic twist of history, Tim Geithner will put a pen to the FHA bailout before the end of the year. It will be his last act as Treasury Secretary. Our boy Tim came in bailing, he is going out bailing. He is, and always will be, the Bailout King.

Here's how it will work:

- Geithner will use his own bank, The Federal Financing Bank (FFB). This bank is owned by the US Treasury, and Geithner is the the Chairman of the Board.

- No Congressional legislation is required for Geithner/FFB to make loans to, or guaranteed by, government agencies. Geithner doesn't even have to take a call from a Senate Republican. Tim has the only signature required.

- FHA will get a $50Bn line of credit from FFB. It will immediately draw $20Bn in order to replenish the reserve accounts. FFB will book the advance as a loan. FHA will book it as a subordinated capital note, and therefore treat it as tier one equity. Of course this is all accounting rubbish. Just what's necessary to maintain the charade.

- Speaking of charades and accounting rubbish, the loan from FFB will not be reflected in America's debt profile. The FHA loans are not part of the Debt Subject to Limit. That's just the rules of this game. Loans to Solyndra were guaranteed by DOE, so the money Treasury borrowed to make the bad loans to Soly never showed up on the books. Talk about a neat trick!

- Treasury will issue a few more notes to the public to come up with the cash that FHA needs to honor its guarantees. That's not a problem at all. Maybe Bernanke will buy some of the paper, just to keep a necessary balance.

- With Ben B Zirping, the Vig for the FHA will come in at a very low rate. The FHA will borrow $30-40Bn and not pay a dime over 3/4 percent. Can you say "magic?

 

The foregoing is well more than a guess on my part. There is a road map for this type of problem. The FDIC was down to nickels back in 1991. It got a line of credit from the FFB for $30Bn. Later the FDIC line was increased to $100Bn. When the SHTF in 2009 the line went to a cool half trillion. When it comes to providing credit to government agencies that have outstanding guarantees to the public, the FFB is the way to go when in need of some cheap/fast cash.

 

 

There is a lot of talk going around that reads, "The debt doesn't matter". Maybe that's true. That, or the whole thing is smoke and mirrors. The FFB bailout of FHA will be of the smoke and mirrors variety.

 

 

 

 

 

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Fri, 11/16/2012 - 13:29 | 2988501 ghostfaceinvestah
ghostfaceinvestah's picture

It is Bernanke who is bailing out the FHA.  Note that the FHA will raise insurance premiums once again.  FHA premiums are double what they were a few years ago.  This affects housing afforability as the borrower's monthly payment goes up.

How to get the borrower's payment back down?

Why, Bernanke's money printing to buy MBS, of course.

Note also the GSEs have been raising their fees.  And now all their profits go to the government.

Bernanke is providing cover for the government to raise revenues.  The burden is falling on the private investors who own MBS and are taking lower interest payments.  The government takes the higher revenue.

Fri, 11/16/2012 - 12:14 | 2988041 BlackSunshine
BlackSunshine's picture

I for one am glad I own FHA bonds. I bought them after the crisis, along with many other bonds, of companies/insitutions that were being bailed out. It was the easiest trade ever in the history of the market. Bernanke told everyone the banks were being bailed out, basically, "buy debt of banks, it's safe."

This is just a twist on that same policy.

I love the money printers and bailout kings....quit whining, hop on board, or wait till the crisis gets to the boiling point, and use your cash for trash, back up by American sovereign strength.

Fri, 11/16/2012 - 12:41 | 2988224 DR
DR's picture

Indeed BlackSunshine,

 

Those who betted on financial state capitalism as the future form of Federal government after the GFC did nominally well on their profits.
Those who thought that market capitalism was going to dominate got slammed.

Fri, 11/16/2012 - 12:11 | 2988003 DR
DR's picture

Why is this such a surprise? The FHA program is another extension of the bailout of the MBS banking crises. Plenty of investors were/are buying distressed homes from MBS, flipping for a profit to new buyers via FHA financing. The Federal government has always implicitly guaranteed a floor in the RE market.

Fri, 11/16/2012 - 11:49 | 2987878 Earl of Chiswick
Earl of Chiswick's picture

California has a poverty rate of 23.5 percent, the highest of any state in the country, according to figures released this week by the United States Census Bureau.

The second most poverty-stricken state was Florida, at 19.5 percent.

________________

 

“My favorite moment: Traveling to Florida from California to get out the vote. We did it!” —Catherine, CA

Fri, 11/16/2012 - 13:12 | 2988397 JR
JR's picture

One by one, the pins fall as the banker bowling ball clears the alley. And Banker America closes the noose around free enterprise and gains its leverage with debt. It's off to work we go, the more we owe, the less we own: Banker America.

And all the while, “FHA.com:another American dream comes true” continues to push these imploding low down payment loans as per this current quote:

 “When it comes to FHA loans, the traditional, bare-minimum down payment amount is 3.5% of the contract sales price of the home. Since FHA down payments are calculated by multiplying the sale price of the home by 3.5%, if you don’t know the specific sale price of the home, you won’t be able to come up with an exact figure for that down payment…” Said TARA SIEGEL BERNARD this past February:

“The agency does not make loans, but insures mortgages that meet its guidelines: people with credit scores of 580 or more can put down as little as 3.5 percent. As a result, the number of mortgages backed by the F.H.A. has ballooned, accounting for 40 percent of all new purchase mortgages in 2010, up from 4.5 percent in 2005, agency figures show.

http://www.nytimes.com/2012/02/28/business/fha-raising-its-mortgage-fees.html?_r=0

Hispanics, according to the Center for Responsible Lending, accounted for 48 percent of California homes repossessed from at the height of the banker-induced foreclosure crisis from late 2006 through 2009, or almost half the state's 625,356 foreclosures.

Former President George Bush's home ownership program called for the building of 5.5 million new homes for minorities before 2012.

Citing high down payments a major obstacle to home ownership for low-income families, he pushed for expansion of the American Dream Down Payment Fund.

Barack Obama was the attorney repesenting ACORN as the driving force behind a 1995 regulatory revision that greatly expanded the Community Reinvestment Act ( CRA) that laid the groundwork for the Fannie Mae, Freddie Mac home financial crisis.

Instead of a homeowner's dream, it turned out to be a banker's dream.

Fri, 11/16/2012 - 11:36 | 2987824 nah
nah's picture

what is not good for anyone

.

is good for everyone TGG

Fri, 11/16/2012 - 11:33 | 2987809 patience...
patience...'s picture

Call in all the FHA loans and disband it, let the "free" market do what it's intended to do.

Sat, 11/17/2012 - 22:07 | 2992737 Zero Govt
Zero Govt's picture

Never a truer word spoken 

the West is so far from a free market system you need binoculars and a vivid imagination to fill in all the beneficial details we're missing

Govt: a monopoly institution from which 1,000's of rotten fruits hang ..time for a lumberjack

Fri, 11/16/2012 - 11:28 | 2987789 Everybodys All ...
Everybodys All American's picture

No budget. Democrats will demagogue any attempt to reign this in as racism. You wait and see.

Fri, 11/16/2012 - 11:27 | 2987776 MilleniumJane
MilleniumJane's picture

Maybe Barnum and Bailey will let us borrow a few elephants to attain some justice:

http://filipspagnoli.wordpress.com/2012/08/10/capital-punishment-45-death-by-animal/

 

Fri, 11/16/2012 - 10:52 | 2987617 DaveyJones
DaveyJones's picture

I prefer Geithner to just bail

Fri, 11/16/2012 - 10:38 | 2987560 vote_libertaria...
vote_libertarian_party's picture

I new this would happen just because my step-daughter was able to get a 3% down loan this year.  She has terrible credit and has had it for 7+ years.

 

I imagine they have millions of people like her just 1 flat tire or diswwasher repair away from delinquency.

Fri, 11/16/2012 - 12:16 | 2988064 BlackSunshine
BlackSunshine's picture

I know a few people like your step daughter...they're fun, and I help them out with their rent payments occasionally.

She'll be fine....btw, picture, number, height/weight etc....

OINK OINK.

Fri, 11/16/2012 - 11:32 | 2987800 MilleniumJane
MilleniumJane's picture

I know a few people like your daughter.  Paying groceries, gas and medical bills with credit cards, changing their phone numbers to avoid collection agencies...it's just sad.  Talking to them is like beating your head against a wall.

Fri, 11/16/2012 - 11:46 | 2987872 LongSoupLine
LongSoupLine's picture

Talking to them is like beating your head against a wall.

 

Hence the reason they're in the situation they're in.

Fri, 11/16/2012 - 10:24 | 2987501 hooligan2009
hooligan2009's picture

hmmm lets combne two snippets from the blooberg article here: 

http://www.bloomberg.com/news/2012-11-16/fha-sets-stage-for-taxpayer-sub...

"More than 17 percent of all FHA loans were delinquent in September, according to data on the agency’s website."

"It shows that the fund’s assets aren’t enough to cover projected losses on the $1.1 trillion portfolio of mortgages the agency insures."

does this mean that losses are already $180 billion and does it mean this 180 billion is growing?

Fri, 11/16/2012 - 12:27 | 2988135 vinoverde
vinoverde's picture

?? No, delinquency is an indication of foreclosure. If delinquency leads to actual foreclosure there will still be a recovery. Loss is Face - Recovery. But since this is a political tool of an org, doing what it was not intended to do, I expect the cramdowns will result in reasonably large discounts to face value.

 

Fri, 11/16/2012 - 10:01 | 2987412 Bicycle Repairman
Bicycle Repairman's picture

How many shells are there in this ^&%ing shell game????

Fri, 11/16/2012 - 10:03 | 2987422 Eireann go Brach
Eireann go Brach's picture

FHA is no different than subprime lending! You have seen nothing yet as FHA was writing the worst of these loans in 2008 & 2009, and they are flooding down delinquency lane like Sandy on steroids!

Fri, 11/16/2012 - 10:08 | 2987445 d edwards
d edwards's picture

To put it more accurately, the TAXPAYERS will bailout FHA.

Fri, 11/16/2012 - 10:20 | 2987480 hooligan2009
hooligan2009's picture

timmays and bens legacy will be how to turn bank notes into precious metals, or is that 0's and 1's all multiples of 15 x 0's of them.

Fri, 11/16/2012 - 09:54 | 2987381 ouchtouch
ouchtouch's picture

All I want to know is how many $1 trillion platinum coins will Timmy mint before he departs?

Fri, 11/16/2012 - 09:46 | 2987345 LongSoupLine
LongSoupLine's picture

$16.3B??...

 

Phhhttt, shit, that's the USPS monthly burn.  No problem.

 

(Thanks for yet another great article Bruce!)

Fri, 11/16/2012 - 09:37 | 2987312 MFLTucson
MFLTucson's picture

How about forcing the banks that have gotten all the free taxpayer money to lend?  No longer an option, they just take from the systom?

Fri, 11/16/2012 - 09:37 | 2987311 LawsofPhysics
LawsofPhysics's picture

100% out-of-control executive branch of government and fascist police state.  Hedge accordingly, things will start moving a bit faster from now on.  Fuck it, let the fuckers do exactly what they want and watch the unintended consequences roll forth.  We are now no different than the Soviet Union pre-collapse.  Just like the U.S.S.R. at the time, we have unpayable debt.  Bruce, why not review how the Soviet Union got out from under their debt.  The same will happen here.

Fri, 11/16/2012 - 09:18 | 2987252 wonderatitall
wonderatitall's picture

why hitler was so beloved. our democrat fascists always were enamored by the fascists. obama , a racist murdering disciple of peace is not different. a man not from this country and a hatred for people other than himself who sees his goal as "transforming" america into an image of himself. hitler , mussolini and obama sittin in a tree..k i l l ing you and me

Fri, 11/16/2012 - 10:25 | 2987508 otto skorzeny
otto skorzeny's picture

Hitler always had the best interest of the Germans at heart- the carrions that are picking over the remains of the USA-not so much

Fri, 11/16/2012 - 10:38 | 2987555 Oldwood
Oldwood's picture

Yet Hitler ended up destroying Germany. One does not need to be evil to do great harm, but it does make it easier.

Fri, 11/16/2012 - 09:08 | 2987193 the not so migh...
the not so mighty maximiza's picture

When you run out of money to launder , just say "fuck it" and print more.

Sat, 11/17/2012 - 21:43 | 2992704 Zero Govt
Zero Govt's picture

another part of the crumbling State for bubble Ben to support

the US Govt is becoming mighty dependent on that private cartel, the Fed. Is it not a US Constitutional issue for the State to be sucking on the teet of a private monopoly?

Fri, 11/16/2012 - 08:59 | 2987165 falak pema
falak pema's picture

Fha : free handed aid. 

If you hold the pen in the right hand and the debt due in the left hand, the right hand can sign in more bread before the left hand waves out the receding  debt gravy train. Especially if the right hand has access to a private government stash of its own. Bejesus, one that got away...from the tax payer's cuckoo nest!

What's wrong with having two hands that act independently and never, never talk to each other... "swear on my mother, who popped them both."

Would you doubt the mother of the administration that routed the economy in the sub prime fest?

Sweet Fanny and hard Freddy wouldn't buy that.   They would see red and tell you "you're dead before you hit the tarmac!"

Timmy loves blowing kisses to his mother before he sings to her "bye bye mom, its time I collected my pay check for doing all this hard, thankless work."

Fri, 11/16/2012 - 08:54 | 2987154 sangell
sangell's picture

The loans to the FHA will be concealed.

The foreclosed properties the FHA holds will be held off the 'market'

The Potemkin economy marches on.

Fri, 11/16/2012 - 10:27 | 2987516 otto skorzeny
otto skorzeny's picture

you can go on zillow.com now and see all of the houses in preforeclosue(missed a payment or two) -it is fucking scary. that does not include underwater homes(and not the ones in NJ).

Fri, 11/16/2012 - 09:17 | 2987238 Orly
Orly's picture

Kinda makes one wonder what are the Fed(s) doing with all this property, eh?

Fri, 11/16/2012 - 08:46 | 2987134 Vincent Vega
Vincent Vega's picture

Excellent work Bruce. +10

Fri, 11/16/2012 - 11:52 | 2987892 koncaswatch
koncaswatch's picture

I second that... BK is the ZH guru of "how things work" and piques the interest of other knowledgeable people to post; result: we all learn something.

Fri, 11/16/2012 - 08:37 | 2987103 strangeglove
strangeglove's picture

Might as well sign some fiat over to the USPS as well. It's not like its his money.

Fri, 11/16/2012 - 08:37 | 2987102 JoeStocks
JoeStocks's picture

This issue with the FHA shows how absurd it was for the government to put Fannie and Freddie (FnF) into conservatorship. No bailout was ever needed. FnF had plenty of reserves and cash flow to weather the storm. The treasury required FnF to borrow from the treasury through the issuance of senior preferred shares $1 billion dollars each just to be put them into conservatorship. Then they required FnF to “borrow” more taxpayers dollars when ever their assets values dipped below their liabilities – or when they were "technically insolvent." Several big companies are technically insolvent, like Delta Airlines and AutoZone. They pay their bills just fine, and FnF could have too until they got back to profitability. On top of having to get capital from the Treasury that they did not need, they were also required to pay the government a 10% dividend. This required FnF to get even more funds from the government as paying the dividend on occasions caused their assets to dip below their liabilities. FnF has paid over $50 billion in dividends for funds they could have got along without.

It gets wprse. On August 17th the US government said FnF no longer has to pay the 10% dividend on roughly $190 billion. They now require FnF to hand over all of their profits starting in January. Looking at recent profits that would have the government earning nearly 20% in interest charges. Would one ever think that Uncle Sam would turn into a loan shark. The FnF shareholders have also never been given a plan to pay back the principle, not will they be able if the government confiscates ever dime they make.

FnF loan quality has always been better than the FHA’s. If the FHA is now just coming to a need to possibly tap the taxpayers, why wasn’t it expected that FnF could have done the same with their superior cash flow and lower delinquency rates. The shareholders are being robbed of their company. One can argue that the government should get out of the mortgage business. But the government should still respect the private individual ownership of Fannie and Freddie and allow the shareholders the ability to remove themselves from conservatorship. Conservatorship is to protect value, not to steal it.

Fri, 11/16/2012 - 21:40 | 2990430 Blankenstein
Blankenstein's picture

Study Finds Extensive Fraud at Fannie Mae

http://www.washingtonpost.com/wp-dyn/content/article/2006/05/23/AR200605...

"The company's consistent performance was not an "uncanny coincidence," investigators wrote, but a product of executives willing to dip into "cookie jar" reserves to make up a shortfall, then push excess earnings off into the future as a cushion for the next bonus cycle"


Fannie, Freddie Insolvent after Losses Poole Says.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=as4DEc5UFopA

 

"Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.

``Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,'' Poole, 71, who left the Fed in March, said in the interview yesterday."

 

Fri, 11/16/2012 - 09:35 | 2987304 machineh
machineh's picture

'Several big companies are technically insolvent, like Delta Airlines and AutoZone. They pay their bills just fine, and FnF could have too until they got back to profitability.'

Fannie and Freddie benefitted all along from an explicit $2 billion credit line from the Treasury, which turned into an unlimited line when they exhausted all their capital.

Without the Treasury guarantee, their business model wouldn't exist. True to their corrosive 'heads we win, tails the Treasury loses' incentives, Fannie and Freddie behaved recklessly and corruptly, and blew out.

Fannie Mae's accounting scandals started in 2003, giving ample warning to shareholders. Sorry you didn't get the memo.

http://www.nytimes.com/2004/12/16/business/16fannie.html

Fri, 11/16/2012 - 10:28 | 2987518 otto skorzeny
otto skorzeny's picture

that's probably why AZ's stock is sky-high as are dogs like HD and Sherwin Williams.

Fri, 11/16/2012 - 08:31 | 2987087 whoknoz
whoknoz's picture

au contraire re: checks and balances...lots of big  checks going into a very unbalanced system...

Fri, 11/16/2012 - 08:10 | 2987050 Downtoolong
Downtoolong's picture

Derivatives may be weapons of mass destruction, but, debt is the ultimate weapon against humanity. Most people don't even see how it affects them. One banker smiles and shakes your hand while another stands behind you and locks the shackles. That’s assuming they still see value in you to support their game. Otherwise, it’s a quick jab with a shiv to the kidney.

Sat, 11/17/2012 - 21:30 | 2992683 Zero Govt
Zero Govt's picture

I don't like people assuming they are a 'victim' when, taking your example, you do not have to sign up to be a bankers debt-slave, you have a choice by not taking on debt

the one area you do not have a choice is Govt and the politicos debt-spending and in the case of broke retail bankers, bailing them out with taxpayers money. US citizens have been 'signed up' to work-off and repay these debts for a generation .But even here you have a choice if you look for it..

Stop Paying Tax ...unshackle yourself from Govt's debt-slavery system, they call it 'democracy' but like everything politicians say/sell, it's a lie

Fri, 11/16/2012 - 01:16 | 2986830 mainpro
mainpro's picture

I was pretty discouraged with America last week but Obama needed to be President with this mess he is about to have all over him. This country will have to hit a true bottom before we can come back from this mess and it does not seem like it will be long before the SHTF. This is a mess not entirely created by Obama but he certainly has not helped at all. How can you keep on runing up this debt at such a pace and not have it all come down on top of you? Greece here we come! We might get to the time we are needing Greece to bail us out, heaven forbid.

Fri, 11/16/2012 - 11:23 | 2987756 Commander Cody
Commander Cody's picture

You will be surprised at how long this Ponzi will float.

Fri, 11/16/2012 - 21:21 | 2990371 steelhead23
steelhead23's picture

That is the stinking truth.  When all the bailouts and ZIRP started I assumed bucky would be trashed.  Nope.  Turns out other global countries' finances were even worse than ours.  Then, when corps stopped making any long-term capital investments, I figured the politicians would try to get the nation's debt balloon under control.  Nope.  I read various bear blogs every day and note that a lot of shorts are now crying in their beer.  I still believe we're gonna crash - I no longer believe it will happen anytime soon.  I now wonder if civil war isn't more likely.

Fri, 11/16/2012 - 13:06 | 2988366 NotApplicable
NotApplicable's picture

"But I flushed three times already!"

Fri, 11/16/2012 - 09:44 | 2987337 CrimsonAvenger
CrimsonAvenger's picture

We're nowhere close to true bottom. You need to give some thought to how bad true bottom can be.

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