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FHA on the Brink of Disaster

Written By Brian Hicks

Posted October 12, 2009

More than a year after the government took control of Fannie Mae and Freddie Mac, both of which were on the brink of disaster, what have we learned?

Absolutely nothing.

According to a congressional hearing, the Federal Housing Administration “appears destined for a taxpayer bailout in the next 24 – 36 months.”

And believe me – this should go over really well with taxpayers.

But it didn’t take a genius to see this one coming. A year after bailing out the over-leveraged Fannie and Freddie, the FHA has managed to put itself in the same predicament.

You see, when our market stopped issuing easy money last year, the “geniuses” at the FHA stepped in and became the big player in the mortgage loan business. So, FHA went from insuring 6% of new mortgages to 21% in 2008… .and even more in 2009.


Nowadays, the FHA insures 5.4 million mortgages – most of which only required 3.5% down payment at a value of “only” $675 billion. Unfortunately, the FHA forgot to beef up its cash position, which sits at just $30 billion. That’s about a 20:1 leverage… and should end well, as insured loans only begin to deteriorate.





So what happens when the FHA goes down the drain? Unfortunately, we can’t let that happen because there’d be no mortgage market.

Dig deep in your pockets, folks. We’ll be paying for another failure.

None of this should come as a shock, though. We first brought this to your attention in late September:

Be prepared to fork over more of your hard earned dollars to Uncle Sam, who continues to guarantee and insure loans to just about any one who wanted a house. The financial decay continues… and this time, it isn’t Fannie or Freddie on the chop block, it’s the Federal Housing Administration.

The Federal Housing Administration has said its cash cushion will dip below mandated levels for the first time… but insists that it won’t need a taxpayer rescue (where have I heard this before?).

The agency, a source of income for first-time home buyers is facing mounting concerns that it will need a taxpayer bailout, despite what it’s telling the public. As of this summer, 17% of FHA borrowers were at least a month behind or in foreclosure, as compared with 13% for all loans.

Those rising defaults mean FHA reserves could sink below the 2% mark required by federal law. And a study being sent to Congress this November is expected to show that percentage dipping below required levels for the first time.

According to the Wall Street Journal:

It isn’t clear how the rising losses may affect home buyers. Options for the agency could include politically unpalatable choices, such as asking for taxpayer funds to boost reserves or increasing the premiums borrowers pay for the insurance offered by the agency. Agency officials say if there is a shortfall, they don’t have to do anything except report it to lawmakers. But some mortgage and housing analysts see trouble ahead. “They’re probably going to need a bailout at some point because they’re making loans in a riskier environment,” says Edward Pinto, a mortgage-industry consultant and former chief credit officer at Fannie Mae. “…I’ve never seen an entity successfully outrun a situation like this.”

But hey, it’s only money, right?

When you have trillions in debt, what’s a few billion dollars more?