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)