CNBC Video: Larry Kudlow & John Carney on the FHA and Government's Housing Bias
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One year after rescuing Fannie and Freddie (to the tune of $200 billion, and still growing), what has the government learned about irresponsible mortgage lending.
Absolutely nothing.
Ultimately this is politics and bubble re-blowing. The FHA was pressured to fill the void in the mortgage origination market last year when private players were exiting. Rather than allow market forces to determine housing prices which might extend the pain, Washington in its own re-electable self-interest, has decided to to re-inflate the bubble, debt and deficits be damned.
It's free money for everyone. The IRS isn't asking for proof. Even 4-year-olds are getting in on the $8,000 homebuyers tax credit. What could possibly go wrong?
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- In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.
- Rising defaults have eaten through the FHA’s cushion. Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, a figure roughly equal to the national average for all loans. That is up from 5.4% a year ago.
- Resulting FHA losses are offset by premiums paid by borrowers. Federal law says the FHA must maintain, after expected losses, reserves equal to at least 2% of the loans insured by the agency. The ratio last year was around 3%, down from 6.4% in 2007.
- If its reserves fall short, the agency is obliged to notify Congress, which could spark a commotion over the extent to which the government is funding losses in the housing market.
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- The FHA has expanded from guaranteeing just 2% of mortgages to over 25% in just a couple of years, dramatically raising its exposure to the still declining US housing market.
- The FHA still backs toxic, almost-no-money down mortgages. It will currently guarantee mortgages with as low as 3.5% downpayments.
- The FHA's mission is political: it is still trying to "expand home ownership."
- The discredited ideology of home ownership is the most toxic ideology since communism.
- The number of mortgage companies whose loans are backed from the FHA has grown from around 1,000 to over 3,300 but the FHA hasn't grown its ability to analyze these companies.
- A recent audit of FHA applications found only 5% included all the necessary documents.
- The leadership of the FHA is completely oblivious to its coming ruin.
- The FHA is in even worse shape than Fannie Mae and Freddie Mac.
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From the New York Times
- “It appears destined for a taxpayer bailout in the next 24 to 36 months,” Edward Pinto, a former Fannie Mae executive, said in testimony prepared for the hearing. Mr. Pinto, who was the chief credit officer from 1987 to 1989 for Fannie Mae, went further than most housing analysts and predicted that F.H.A. losses would more than wipe out the agency’s $30 billion of cash reserves.
- The issue has polarized Congress. Republicans, who led efforts to rein in Fannie Mae and Freddie Mac before those companies ran into trouble, are now seeking to bridle the F.H.A. Many Democrats insist the F.H.A. is playing a vital role in the housing market, which is only just starting to stabilize.
- “F.H.A. has stepped into the void left by the private market,” Representative Maxine Waters, Democrat from California, said at the hearing. “Let’s be clear; without F.H.A., there would be no mortgage market right now.”
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