Guest Post: The FHA Is Blowing Up: Bad News For The Housing Market

Tyler Durden's picture

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

A very important article came out from the Wall Street Journal yesterday titled “FHA Nears Need for Taxpayer Funds,” and it outlines the serious financial problems facing the Federal Housing Administration.  For those that are unaware or need a refresher, the FHA has been the key element to the phony “housing recovery” the government has been trying to create.  In the wake of the collapse of 2008, Fannie Mae and Freddie Mac blew up and what was left to pick up the pieces was the FHA.  No private player would issue loans with down payments of 3%, but this was no problem for the FHA!

Interestingly enough, a lot of the subprime borrowers that blew up the housing market the last time became the primary customers of the FHA.  Let’s see, 3% down and subprime borrowers…what could possibly go wrong?!  From the WSJ:

The Federal Housing Administration is expected to report this week it could exhaust its reserves because of rising mortgage delinquencies, according to people familiar with the agency’s finances, a development that could result in the agency needing to draw on taxpayer funding for the first time in its 78-year history.


Together with Fannie and Freddie, federal agencies are backing nearly nine in 10 new mortgages.


The FHA accounted for one third of loans used to purchase homes last year among owner occupants.


Though the agency guarantees fewer mortgages than either Fannie or Freddie, it now has more seriously delinquent loans than either of the mortgage-finance giants. Overall, the FHA insured nearly 739,000 loans that were 90 days or more past due or in foreclosure at the end of September, an increase of more than 100,000 loans from a year ago. That represents about 9.6% of its $1.08 trillion in mortgages guaranteed.

This is a big deal.  The FHA is already in trouble despite a miraculous “housing recovery” and we haven’t even hit a severe cyclical economic slowdown yet, which is almost certain to occur in 2013.  What shambles do you think the housing market will be in once that happens and the last backstop to housing is broke?  You can kiss this “housing recovery” goodbye.  I think home prices nationally could fall 25%+ from here.  For more detailed thoughts on housing read my piece from April titled Thought of the Day – House Flipping in Colorado.

Full WSJ article here.

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The Gooch's picture

Section ATE itself.

Popo's picture

Another awesome piece from Mr. Krieger.  

But.. I must make one comment on semantics:   When housing prices go down it is "good news" for housing prices, not "bad news".   Please note that in every other industry, falling prices is considered a "good" thing.   If food prices go down, we all agree that this is "good".  If gas prices go down, we all agree that this is "good".  But when it comes to housing prices, banking propaganda (which has infected the media) has everyone believing that falling housing prices are "bad".   To adopt this mindset is to ally oneself with housing investors, banks and mortgage originators.   It also pretends that houses are an "asset class" and not both a consumer durable and a necessity of life.   When the necessities of life fall in cost, this is in no way "bad news".   On ZH of all places we should avoid this rhetoric.

So the "good" news is that housing prices may fall.    That's great to hear.   The next generation of Americans will benefit greatly.   That's important.


Bohm Squad's picture

+1...We want asset prices to increase and liabilities to decrease - a house is a liability regardless of what my banker says.

NotApplicable's picture

Well, given that the FHA is likely sitting on a sizable inventory, they should just get reverse mortgages from The Fonz.

AldousHuxley's picture

Housing is only an asset to a bank for mortgage interest income and to governments for real estate tax.


For purchasers it is a liability.


Isn't it funny how the expensive housing is located near central bank branches?


It is set up to give more power to bankers over economy.

MillionDollarBogus_'s picture

Falling prices = deflation.
Bernanke's worst nightmare.

AldousHuxley's picture

price correction  = American capitalists getting what they deserve....lower asset prices for economic policy that drove jobs out of the country last 30 years of neo-liberal policies.


jobs have been exported, but elites are refusing to have their assets devalued and want unemployed workers to pay more taxes to pay for housing subsidies.


solution is 50% cut in housing costs. Cap that shit along with medical cartel to % of GDP so people can spend money on stuff other than some old ugly house.



NooooB's picture

Where is the outrage?!  This Mortgage crisis is such bullshit on all fronts. Why should people who lied on their mortgage applications, or simply over-leveraged themselves be given a pass? If they Lied, They should be prosecuted for fraud. If they over-leveraged, then oh well, tough shit. And instead of prosecuting the banks for deceptive practices- both on the consumer side, and then when they packaged these shitpiles ito MBS's. And WHY THE FUCK should the FED be buying these TURDS as though they WERE ACTUALLY A THING?!! Fuck the banks! MARK THAT SHIT TO MARKET and let the chips fall where they may! The FED will take that shit off their books and WE will pay the price. If this isn't just another shit show of consumer/corporate welfare than I don't know what is...

AGuy's picture

Call me Cynical (or Ishmael if you perfer)

Why do I think the FHA is going to get a big fat bailout soon? If not from Congress then from the Fed as Bernanke said that Banks weren't doing enough. Bernanke could just buy of worthless FHA loans thus freeing up capital for FHA to continue betting on bad loans.



AldousHuxley's picture

Fed's job is to stablize the market, but in reality they serve to protect the downsides only.

Keynes too...said government save surpluses in good times, spend the surplus in bad times. Politicians practice spend in good times, spend debt in bad times.

Fed has been letting bubbles get too big in good times, rescue banks with government subsidies in bad times as buyer of last resort.


that means buying overpriced shit and preventing real free market correction.


imagine how much more people would have if housing costs less? there's plenty of land, just regulations blocking building.


but Fed lets markets overheat, but do not overcorrect. This works in favor of status quo  and bankers because poor can never get a good deal on an asset sale.



AGuy's picture

"This works in favor of status quo and bankers because poor can never get a good deal on an asset sale."

Not so sure on that. Its usually the rich that buy up distressed assets for pennies. Example the S&L assets sold through the RTC during the late 80's and early 90's.

FWIW: My point is that I don't believe the FHA issues will result in another big RE sell off. As the Fed will step in and provide liquidity. They already commited a pound of flesh during the 2008 crisis. I don't see them not bailing out the FHA.

"imagine how much more people would have if housing costs less?"

Housing prices are only a portion of the issue. The 800 lb gorrilla is credit. Without cheap and easy credit the sheeple can't afford to buy even at reduced prices, even at half-off prices considering that consumers can only make 3% to 5% downpayments at existing prices. The Housing bubble consisted of about 25% of NINJA loans (No Income, No Job or Assets).

In my opinion the Fed already injected a lethal dose of Credit Herion during the last decade. Its just a matter of time before the patient dies, no matter what the Fed does. If the Fed withdraws, spiraling deflatiion, pump stagflation (current) or high inflation (coming).




StychoKiller's picture

It's obvious you just don't care enough about the moochers...

Stock Tips Investment's picture

In the present circumstances is bad news. There are still "too much" people who are heavily indebted to their homes. A fall in the price of houses, creates a new financial problem. A financial problem, it always ends in a general problem in the economy. If a fall in house prices, "activate" the claim, then would be nice. But that is not the case right now.

NEOSERF's picture

Asset prices and particularly "Retirement Asset Prices"...subtle but important given the pig in the python boomers represent right now.

Jethro's picture

The government is reaping the benefit of this news from starting the idea in the late 90's that housing was an "investment" and not a commodity---and somehow immune to supply and demand.  This could only happen with the involvement from the government and banking sector working together to get people that could never afford houses, into housing contracts at any cost.  Let the market clear this mess.

I can't see how prices won't go down.  I just wonder what interest rates on housing will do?  Can they de-couple from ordinary interest rates, and then fall under a different regime?  Anybody know the answer to this speculation?

NotApplicable's picture

There's no longer any such thing as ordinary interest rates, given the actions of Timmah, backed by Bennie and the Inkjets.

Besides, rates are no longer the determining factor for most, as creditworthiness no longer exists in the supply of potential homeowners. Demand was pulled forward until the vacuum it created imploded the entire "market."

As for the future, your interest rate will be determined by your political minority status, assuming you're in the right one.

AldousHuxley's picture

the trick is not to let nominal price go negative.

real price compared to real assets and inflation adjusted is negative on housing.


stable home price during 4% inflation means you lost 4% of the largest asset you got stupid americans.


measure housing prices against college costs or healthcare costs and you will see how rich you really are.

ptoemmes's picture

Right.  Agree.  


But in the up-is-down world you reference it is good (or desired by the central planners ) because the desired result is not "just" increased home value/prices.  No, it's increased value in excess of balance due on the mortgage resulting in equity, resulting in HELOCs or equity extraction re-fis - an intermediate end in and of itself - but the ultimate then is to - buy baby buy shit.


See other top post on The Bernank demanding more out of tapped out homeowners.


Not me....

midtowng's picture

Wasn't Fannie and Freddie supposed to be getting wound down as well?

kalasend's picture

What is the historical reason (if there's one) that mortgage loans got no initial margin? 

Just imagine if there IS initial margin on mortgage loans, the entire world can be honest about just a bunch of bricks...

hedgeless_horseman's picture



I am going to go out on a limb, here, and predict another bailout using freshly printed Bernanke Bucks.

If your only tool is a printing press, then every problem is deflationary.

hairball48's picture

I am going to go out on a limb ..... ROFLMAO!!

tickhound's picture

more like a stub, made of concrete.

otto skorzeny's picture

wait- who's the tool -The Bernank or his printing press?

SilverFish's picture

Both are tools.


One can be retooled to make Playboy magazines, the other is a sociopath and has no real benefit to any sane person.

Bicycle Repairman's picture

Let's take it a step further and create a new federal agency and fund that.  Then they don't have to say that Fannie or Freddie or the FHA is BK or needed a bailout.  Just say that mortgages are now insured by the Federal Housing Safety Administration or whatever you want to call the slush fund.

Just add another shell to the shell game.

Alhazred's picture

This is why we need a gold standard.

And an end to the fed wouldn't hurt.


rosiescenario's picture

...nice...however with WWIII now kicking off in the ME, it will go unnoticed.

steelhead23's picture

Well, surely the FHA cannot default and obviously will get a loan from Treasury - or Bernanke will buy some FHA "assets" for 100 pennies on the buck or other such nonsense.  This is obvious.  What isn't so obvious is how would FHA pay for loans it might get?  Would it raise insurance premiums and further deflate housing's sails?  Also, all laughing aside, I am wondering how Obama, whose central talent is public speaking, will respond to the crumbling of the facade of normalcy he has struggled to create.  I don't mean just the rhetorical gaming of FHA's bailout, but really dealing with the issue in a forthright and effective manner?  After all, a large portion of FHA's problems were set in motion by the global settlement of foreclosure fraud - a settlement in which Obama loudly touted the princely sum of $25 billion extracted from the banksters.  Yves piece on this issue suggests they are more than $50 billion in the red.  The ring in hell for politicians has them explaining why all their rhetorical successes turned out to be reality failures - no teleprompters allowed.

youngman's picture

Hey...but we are making a profit on our GM stock...right? ....oh oh

Manthong's picture

 There have just got to be some logical Keynesian investment approaches for Obama to take and get this fixed.

What if he covered all the FHA house rooftops with Solyndra tubes, put a Chevy Volt and charging station in every garage and assigned each house its own personal mail carrier?

That seems like a truly Obamaniacal  government solution to this problem.

Schmuck Raker's picture

We will as soon as we sell some of our interest in Ally to those suckers at AIG. Ha hah...oh, wait.

TruthInSunshine's picture

I cited this article in a thread yesterday, and it's truly disturbing. The FHA is the taxpayer.

But everything's fine ("The Joes" said so; LaVorgna & Weisenthal):


WSJ: Housing Agency (that insures 84% of New Mortgages) Close to Exhausting Reserves

From the WSJ:

"Overall, the FHA insured nearly 739,000 loans that were 90 days or more past due or in foreclosure at the end of September, an increase of more than 100,000 loans from one year ago. That represents around 9.6% of its $1.08 trillion in mortgages guarantees.

The FHA's annual audit estimates how much money the agency would need to pay off all claims on projected losses, against how much it has in reserves. Last year, that buffer stood at $1.2 billion, representing around 0.12% of its loan guarantees. Federal law requires the agency to stay above a 2% level, which it breached three years ago.


The decision over whether the FHA will need money from Treasury won't be made until next February, when the White House typically releases its annual budget. Because the FHA has what is known as "permanent and indefinite" budget authority, it wouldn't need to ask Congress for funds;

[...wait for it...] would automatically receive money from the U.S. Treasury."

So, the real kicker is that the FHA (which now insures 84% of all new home mortgages since lenders/processors just want the transactional/closing fees & dish that shit off to the taxpayers) won't have to formally request a bailout from the treasury, because such funds are automatically guaranteed under current regulations.

Good thing the Treasury is flush!!!


Housing "Investors" v2.0

hairball48's picture would automatically receive money from the U.S. Treasury."

Is that kinda like FHA's own QEternity?

catacl1sm's picture

What happens if FHA needs money, Treasury is broke, and the Debt Ceiling is hit all at the same time? Perfect storm 3.0?

Schmuck Raker's picture

We'll just borrow from the EU, they're loaded.

BraveSirRobin's picture

By "loaded," do you mean drunk out of their minds?

LMAOLORI's picture



What happens? They just won't put it on the budget no one will be the wiser (sarc) 

Obama's Budget Has One Small, Missing Piece.... For $6.3 Trillion Dollars

HOT: Fed Hides Major Accounting Change

Accounting tweak could save Fed from losses

El Viejo's picture

That's the European solution.

EscapeKey's picture

...meanwhile, in skittle-shitting unicorn Marketwatch-space, where everything is a reason to buy:


Mortgage delinquencies, foreclosures drop Foreclosure starts hit lowest level since 2007: MBA





Federal law


law is only for little people

Skateboarder's picture

Housing will bottom out when million dollar homes are valued closer to cost... say, $250k.

catacl1sm's picture

Million dollar now, 6 years ago, or 12 yrs ago? Big difference.

El Viejo's picture

Whatever the market will bear. 

Get it? Bear? Market? It's a bubble within the first bubble damn it!

otto skorzeny's picture

they're building a few houses around here(330K for a plastic shitbox) but they are being bought by cops, firefighters, other illustrious govt employees that will ALWAYS have a paycheck and a fat pension at 50 y.o. /sarc

El Viejo's picture

Depending on the state they may not have a guaranteed pension. A lot of pension plans are in serious trouble. The laws in some states prevent the raising of taxes to pay off insolvent pension plans. In other states the tax payers may not go down without a fight. Take a look at Wisconsin.

buzzsaw99's picture

The solution (according to the bernank) is to loosen those lending standards.

kralizec's picture

The bottom can't be that far off...I think we can get there quickly. 

the not so mighty maximiza's picture

With Obama we will get there quickly.