The FHA's Fatal Scattergram Flaw

Tyler Durden's picture

Judging by the media rancor, the fact that the FHA has run out of capital is a stunning shock since besides, housing is in recovery right? Well, there is one simple reason why the FHA is FUBAR and is only going to get worse (cue Geithner Bailout). As the only player left, the FHA has simply been the sole source of mortgage provision to the worst of the worst. The following chart from Chicago Booth's Amir Sufi shows the diabolic-distribution of poor-performing zip codes that the FHA has lent into - even during the crisis.

 

 

The chart shows the fraction of losses incurred by the FHA (y-axis) for each zip code (each blue dot) compared to the average household default rate in that zip code... if all was well the points would cluster around that 45-degree red line but as is clear, the FHA has clearly been the source for the worst of the worst borrowers as its loan performance is dismal (above the line)...

We are not sure where to start on this - but once again it seems the government subsidization of the weakest (or most levered) has come back to bite the most sensible, staid and unlevered...

Data source: HMDA and Credit Burean Data

(h/t Amir Sufi @profsufi)

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csmith's picture

It's what the government does and always will do.

CPL's picture

There's an HBO show called Dexter that has spatter patterns as well.

jayman21's picture

It was showtime.....comment was priceless.  +100

idea_hamster's picture

Note that the red line is NOT at 45 degrees -- it maps 60% on the x axis to 80% on the y axis.

A true 45 deg line is much shallower, and falls EVEN FURTHER UNDER all those points -- i.e., it's worse than the red line suggests.

Just sayin'.

economics9698's picture

Affirmative action at work. 

macholatte's picture

 

You can thank the Soros-Clinton Machine for the Community Reinvestment Act which mandated that deadbeats get funding no matter what.

 

What's happening with VA Loans (Veterans Admin)?

waylon153's picture

The ironic part of the Community Reinvestment Act is that you had be to such a deadbeat that they were actually hard to find AND they had to purchase a crackhouse.  On top of that, the compensatioin limits on $40K crackhouses virtually assured no "qualified buyers" because lenders didn't want to waste 200 man hours to make $300.  GIGO.

 

As for the article I'm not drinking the koolaid around here.  These foreclosures are more about job destruction, inflation, and idiot buyers in poor areas.  FHA qualifications have allowed 3.5% downpayments for over 20 years.  Why the attack FHA now?  Why be shocked to see a First Time Home Buyer program be hit hard during a Great Depression.  Once you realize we are in a depression it's not surprising.  What IS surprising is the amount of peope HERE that still don't understand we're in a Great Depression.

BandGap's picture

Very good point, the X and Y scales are different. It IS worse than it appears.

I just sold a house within 5% of the asking price. I cannot imagine what it would be like to be a prisoner in this system.

Skateboarder's picture

Would you advise everyone to sell their house before it's too late? For you to escape the system means you have to trap someone else in your place. ;)

Iam_Silverman's picture

"For you to escape the system means you have to trap someone else in your place."

Well, there's always the "pay it off" option for escape too.  That's the one I chose.

glenlloyd's picture

I'm in agreement with the quote part of this.

As for the 'pay it off' option, it's not really a rosy picture out there either. Property taxes going up, maintenance and the bloody insurance to deal with too. Insurers are trying to prune their losses. I got dumped on a house I own outright, even with no prior claims ever. Besides, if housing prices continue to slide you could be throwing good money after bad. I have two paid off houses and with an uncertain future taxation (property and income) scenario I don't like the looks of home ownership tbh.

When the county coffers run dry who are they going to turn on....property owners.

francis_sawyer's picture

 SCATtergrams from the FHA... Just what we all need...

knowless's picture

i too misread the headline as "scatogram"..

Buckaroo Banzai's picture

Paging Ginnie Mae...Ginnie Mae, please pick up the white courtesy phone...

Jlmadyson's picture

Surprise!

Oh yea, flashy crashy is back!

killallthefiat's picture

The slope on that regression is way higher than the red line drawn.   That is, the more the default rate, the WAY more the % backed by FHA.  Another leg down.

BraveSirRobin's picture

Boy, I'm glad the government is making sure we all have health care. I mean with Fannie, Freddie and FHA going bust, it's conforting they have our back on health care.

GMadScientist's picture

You may want to look at the equally shitty performance of private label sludge before you embark on the victory lap, slick.

 

mayhem_korner's picture

 

 

Below is the complete list of government-provided goods and services that are superior to those from private enterprise:

 

 

.

Ned Zeppelin's picture

Unregulated private "enterprise" mortgages are what go us into this mess - see my next post. 

honestann's picture

No, the government and federal reserve bailing out those private entities is what created the mess.

infotechsailor's picture

Honestann, you are telling the truth!

Ned Zeppelin's picture

I happen to agree, and was as determined against Hank The Traitor Paulson's $700B blank check as anyone here - but that is what the trigger was. You can't blame the GSEs for that.

jeff montanye's picture

well it started with the control fraud in the "private" sector then, when things went bust, the masters of the universe got the "public" sector to bail them out.  i believe the relationship is something along the lines of a million in campaign contributions gets you a billion in government subsidies.  something like that.  billion for a trillion, whatever.

Blankenstein's picture

 

 

"Fannie Mae engaged in "extensive financial fraud" over six years by doctoring earnings so executives could collect hundreds of millions of dollars in bonuses, federal officials said yesterday in a report that portrayed a company determined to play by its own rules."

 

"The result was a company whose managers engaged in one questionable maneuver after another, including two transactions with investment banking firm Goldman Sachs Group Inc. that improperly pushed $107 million of Fannie Mae earnings into future years. "

 

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

hidingfromhelis's picture

Nobody in power wanted to see anything else but more loans, so everyone was compensated based on volume rather than quality or loan performance.  Almost no politician, D or R, wanted to see fewer loans.  The vast majority of loans made money for a TBTF at some point, and they make sure regulations and programs are written to suit themselves.  The absurdity of blaming CRA puts the blame in the wrong place.  Oh no, cue the faux outrage!  More loans = more revenue, and you can be damned sure that financial institutions knew they had TBTF status a long time ago.  At every step of the way, crap loans could be passed on until they hit their ultimate destination...being bailed out by taxpayers...as long as it was a TBTF institution collecting.  Know what?  They lobby and contribute...follow the money.

Blankenstein's picture


"Raines had Fannie buy billions of dollars worth of the risky mortgages, which were described in internal emails as "clearly subprime," to meet "affordable housing" quotas set by HUD. In May 2001, Mudd wrote a memo to his boss warning that EA loans "are the highest default risk loans we have ever done."

It was also under Raines that Fannie partnered with Countrywide Financial to buy, in increasing volumes, the subprime lender's Fast & Easy no-documentation mortgages. These loans were specifically targeted toward borrowers with weaker credit histories"

Read More At IBD: http://news.investors.com/ibd-editorials/012012-598522-franklin-raines-not-in-fannie-mae-lawsuit.htm#ixzz2CSpsLsCa

Poetic injustice's picture

No, you are missing few where government is better:

Misery, suffering, taxes and destruction. And lies.

Iam_Silverman's picture

"Below is the complete list of government-provided goods and services that are superior to those from private enterprise:"

 

War?

Inflation through money debasement?

Ned Zeppelin's picture

GM is absolutely correct and one should always keep in mind this factoid: if you think Fannie, Freddie and the FHA were creating dreck during the boom years, it can't hold a candle to the slickly greased turds that the private mortgage cum private label securitization machines were squeezing out in huge numbers in those days.  In fact, their production of marginal or outright bad mortgages was DWARFED by the private banks. 

It is my view that but for the private mortgage industry we'd be doing OK right now.  That's not to say there isn't plenty wrong with handing out mortgages to those with minimal equity - it is not a great idea (but note- most FHA mortgages by far are not in default), but if we had limited ourselves to Fannie, Freddie, FHA and VA loans, issued under their credit standards, we'd have missed the whole subprime debacle, which triggered far greater problems.

Check your history and your facts before calling BS on this one.  http://www.intellectualtakeout.org/library/chart-graph/growth-mortgage-market-securitization-and-share-market

"The housing boom that began in the late 1990s and the concomitant rise of 'private label mortgage-backed securities' (PLS) shown in Figure 3-1 posed a challenge to the GSEs. This is because the PLS involved non-conforming mortgages (securitized, for instance, by investment banks) that were of lower quality than the mortgages that met the GSEs’ usual underwriting standards or were for amounts that exceeded the GSE conforming loan limit. Borrowers who might otherwise have qualified for a conforming loan were being encouraged by lenders to borrow greater amounts (pushing them into 'jumbo' territory) and/or to structure their loans in ways that wouldn’t meet the GSEs’ underwriting standards (pushing them into the non-conforming territory). The latter was done, for example, by the borrower’s making less than the requisite 20% down payment but not arranging for private mortgage insurance, or by getting a second mortgage loan to cover some or even all of the down payment, or by getting an initial low 'teaser' interest rate but with a scheduled upward adjustment after two or three years.?"

 The market disclipline enforced by the GSE standards for mortgages, and thus securitization, was lost once Wall Street figured out how to game the system by originating, packaging and selling its own private label RMBSs.

chunga's picture

Yes, and the private label jobs have some of the wackiest "credit enhancements" of them all.

(The exact terms are super-secret)

The first rule of credit enhancement club is...you DO NOT talk about credit enhancement club.

MachoMan's picture

Is credit enhancement like where you get NASA to put on its alchemy hat and turn toxic mortgages into AAA rated securities?  [answering the age old question of whether a diamond will pop out if you pack shit tight enough].

chunga's picture

The secret credit enhancements are why you don't see more push-backs.

[double-edit] the credit enhancement[s] is the default insurance bets. The holders of that paper got bailed the fuck out also. They all got paid but that is secret too.

I see what you're saying now...the "no job, no income loans", "liar loans" where lenders were putting in the lies. That's the front end.

On SEC statements the private labels can sneak in a lot more "guarantees" or "credit enhancements" and in some instances do not even need to report it.

Ned is getting junked but he has a point. The GSEs are/were very bad actors...but the private labels are/were even worse.

hidingfromhelis's picture

Unfortunately the private garbage has been allowed to get passed on enough times to eventually become public garbage, GSE or non GSE, so the distinction is a bit of a moot point these days.  

Crtrvlt's picture

more than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions. If so, one would presume the delinquency rates suffered by the GSEs during the crisis would have been very high. But David Min, an analyst with the Center for American Progress, shows that the after-crisis delinquency rates on the large additional portion of GSE mortgages that Pinto claimed were high risk, and that was termed “toxic” by Morgenson and Rosner, was roughly 10 percent, far lower than the 25 to 30 percent default rate of true subprimes.4 In fact, the rate of delinquencies for all GSE securities in 2004 was 4.3 percent, compared to a delinquency rate in private industry of 15.1 percent of mortgages. In 2005, the GSE rate was 7.8 percent compared to 28.7 percent, and in 2006 and 2007, the rates reached 13.2 and 14.9 percent in the GSEs and 45.1 and 42.3 percent in the private market.5 None of these figures are cited in Reckless Endangerment. In fact, losses as a proportion of mortgages guaranteed or bought by the GSEs were far lower than in private industry.

Ned Zeppelin's picture

Shocker - someone with a working cerebellum on this thread.  Beware, these are inconvenient facts for some of the folks on this thread. 

duhhhhhh's picture

It is all really good observation but the real back story is not the failure based on MBS or whether or not the GSEs vs the private lenders were more criminal but rather FHA has been used as a tool as was fannie and freddy and ginnie and sallie to distort markets by pushing political agendas. FHAs underlying function as a political tool is the real story here. Who do you think backed all the loan modifications that keep all of the Obama constituency in their homes until election time? It is correct to assume the banksters had a higher level of default based on credit rating agency collusion with banksters and  their ultimate ability at the time to securitize junk and sell it as AAA but that is over now. So under what auspices do you suppose the banksters would now sit down with a prior lier loan recepient and hammer out a renegotiated mortgage in the absense of securitization. They knew 8 months into these mortgage modification programs that the recidivism rate on the mods were unsustainable yet kept it going for another year and a half. Someone please tell me when the dialogue will begin regarding the stoppage of this unattainable fantasy of everyone deserves a home and why they havent started an investigation regarding the current collusion surrounding this vary manipulation involving government, FHA, and the Banksters? How long will the public continue to swallow this repugnant criminal behavior? WhaT IS REALLY AMAZING HERE IS THAT THE STORY IS SOLELY ABOUT FHA BEING BANKRUPT AND NOT ABOUT THE UNDERLYING CAUSE AND WHEN THE GOV IS GOING TO SHUT IT DOWN.   

duhhhhhh's picture

It is all really good observation but the real back story is not the failure based on MBS or whether or not the GSEs vs the private lenders were more criminal but rather FHA has been used as a tool as was fannie and freddy and ginnie and sallie to distort markets by pushing political agendas. FHAs underlying function as a political tool is the real story here. Who do you think backed all the loan modifications that keep all of the Obama constituency in their homes until election time? It is correct to assume the banksters had a higher level of default based on credit rating agency collusion with banksters and  their ultimate ability at the time to securitize junk and sell it as AAA but that is over now. So under what auspices do you suppose the banksters would now sit down with a prior lier loan recepient and hammer out a renegotiated mortgage in the absense of securitization. They knew 8 months into these mortgage modification programs that the recidivism rate on the mods were unsustainable yet kept it going for another year and a half. Someone please tell me when the dialogue will begin regarding the stoppage of this unattainable fantasy of everyone deserves a home and why they havent started an investigation regarding the current collusion surrounding this vary manipulation involving government, FHA, and the Banksters? How long will the public continue to swallow this repugnant criminal behavior? WhaT IS REALLY AMAZING HERE IS THAT THE STORY IS SOLELY ABOUT FHA BEING BANKRUPT AND NOT ABOUT THE UNDERLYING CAUSE AND WHEN THE GOV IS GOING TO SHUT IT DOWN.   

duhhhhhh's picture

It is all really good observation but the real back story is not the failure based on MBS or whether or not the GSEs vs the private lenders were more criminal but rather FHA has been used as a tool as was fannie and freddy and ginnie and sallie to distort markets by pushing political agendas. FHAs underlying function as a political tool is the real story here. Who do you think backed all the loan modifications that keep all of the Obama constituency in their homes until election time? It is correct to assume the banksters had a higher level of default based on credit rating agency collusion with banksters and  their ultimate ability at the time to securitize junk and sell it as AAA but that is over now. So under what auspices do you suppose the banksters would now sit down with a prior lier loan recepient and hammer out a renegotiated mortgage in the absense of securitization. They knew 8 months into these mortgage modification programs that the recidivism rate on the mods were unsustainable yet kept it going for another year and a half. Someone please tell me when the dialogue will begin regarding the stoppage of this unattainable fantasy of everyone deserves a home and why they havent started an investigation regarding the current collusion surrounding this vary manipulation involving government, FHA, and the Banksters? How long will the public continue to swallow this repugnant criminal behavior? WhaT IS REALLY AMAZING HERE IS THAT THE STORY IS SOLELY ABOUT FHA BEING BANKRUPT AND NOT ABOUT THE UNDERLYING CAUSE AND WHEN THE GOV IS GOING TO SHUT IT DOWN.   

Buckaroo Banzai's picture

So you are saying that the corrupt criminals in government are less effective at being criminally corrupt than the corrupt criminals in the private sector?

NeedtoSecede's picture

Thanks Buckaroo. I was about ready to vomit from the douchebags trolling for the GSEs. A scumbag is a scumbag whether his email ends in .gov or .com.

Human nature is not magically suspended when someone signs on with the gooberment. When your swimming in a cesspool of moral hazard everyone, and I mean everyone, is going to fuck everyone they can to “to get theirs".

Give me a fucking break...

Ned Zeppelin's picture

Not trolling at all for the GSEs, you moron. Just get your facts straight, or stay stupid. Your choice. You see, the bankers want you to believe they are good and government is bad, and in this particular set of facts, there's no doubt the GSEs were bad, but the "private enterprise unregulated types" were absolutely the worst. 

 

chubbyjjfong's picture

And to think that the rating agencies fell over themselves to label those 'pieces of shit' MBS's AAA because of their 'diversity'.  Just plain fucking insanity.  I read that a bank loaned around 700k to an imigrant fruit picker that earned around 15k a year.  Just know that you have rheemed a whole generation you lowlife bottom feeding banking fraud scum of the earth.  Rot in hell.

StychoKiller's picture

                   Excerpt(s) from "The Big Short":

"In Bakersfield, CA., a Mexican strawberry picker with an income of $14,000/yr and no English was lent every penny he needed to buy a house for $724,000."

"By May 2007, however, there was a growing dispute between Howie Hubler and Morgan Stanley.  Amazingly, it had nothing to do with the wisdom of owning $16 Billion in complex securities whose value ultimately turned on the ability of a Las Vegas stripper with five investment properties, or a Mexican strawberry picker with a single $750,000 home, to make rapidly rising interest payments."

"'Who takes out a home loan and doesn't make the first payment?' asked Danny Moses, putting the matter one way.   'Who the fsck lends money to people who can't make the first payment?' asked Eisman, putting it another."

you enjoy myself's picture

don't forget Sallie.  soaring college costs + govt with 98% market share of loans + no jobs after graduation = another massive disaster that no one, i mean no one, could have seen coming

tgeorge's picture

the "45-degree red line" should be connecting equal values on both axis

as both axis have different scales, the line should be flatter lower (0.4 should connect 0.4)

and the results are even worse than portayed

 


SafelyGraze's picture

"the "45-degree red line" should be connecting equal values"

agree completely

a horizontal red line at 50%, for example

the region above the line would fit the caption "FHA underwrites most of the loans in zip codes shown above the red line, where the average default rate is about 30%. Non-FHA lenders provide most of the funds for mortgages in zip codes below the red line, where the average default rate is 10%"